
Class _L_ul_ 

Book >-J 

Copyrights ,f $W 

CDEXRIGHT DKFQSSR 




AMERICAN ECONOMIC LIFE 



THE MACMILLAN COMPANY 

NEW YORK • BOSTON • CHICAGO • DALLAS 
ATLANTA • SAN FRANCISCO 

MACMILLAN & CO., Limited 

LONDON • BOMBAY • CALCUTTA 
MELBOURNE 

THE MACMILLAN CO. OF CANADA, Ltd. 

TORONTO 



AMERICAN 
ECONOMIC LIFE 

In Its 
CIVIC AND SOCIAL ASPECTS 

By 

HENRY REED BURCH, Ph.D. 

CO-AUTHOR OF AMERICAN SOCIAL PROBLEMS 

HEAD OF DEPARTMENT OF HISTORY AND COMMERCE 

WEST PHILADELPHIA HIGH SCHOOL FOR BOYS 

PHILADELPHIA 



THE MACMILLAN COMPANY 

1921 

All rights reserved 



tf* 



|7< 

.5 



Copyright, 1921, 
By THE MACMILLAN COMPANY. 

Set up and electro typed. Published March, 1921 



m 



93 »«" 



Nortoooti $MB3 

J. S. Cushing Co. — Berwick & Smith Co. 

Norwood, Mass., U.S.A. 



©CU611279 



THE SPIRIT OF 

ABIDING AMERICANISM 

THIS BOOK IS 
DEDICATED 



PREFACE 

This book, a restatement of Elements of Economics, 
is an attempt to present in problem form the more im- 
portant phases of American economic life. Based as it 
is upon twenty years of teaching experience in the gen- 
eral field of the social sciences, the writer hopes that it 
may prove not only teachable, but that its material may 
be found to be especially adapted to the needs of the 
elementary student of social science. 

With this end in view, every effort has been made to 
secure simplicity of thought and clarity of expression. 
The material is carefully organized by means of the chapter 
outlines, while the topics arranged at the close of each 
chapter are intended to reenforce and illuminate the 
matter previously presented. This matter, since it is 
entirely elementary in character, is largely descriptive 
and illustrative. Although economic theory is duly 
recognized whenever it touches vitally the problem at 
hand, the main emphasis is always placed on the con- 
crete problem, for the comprehension of which a knowl- 
edge of the theory is essential. Not theory, but economic 
life itself, is the objective in view. 

Of even greater importance in determining the value of 
this work in secondary education is its emphasis upon 
everything truly American in the formation of national 
character. While the book is built around the industrial 
and economic factors in American civilization, its civic 



viii Preface 

and social aspects are everywhere recognized. In fact, 
every economic problem is approached from the civic and 
social standpoint. So interwoven are these phases of 
national development that no adequate treatment can be 
given any one of them without recognizing their close 
relationship and interdependence. Accordingly, this book 
is intended to appeal primarily to all those who believe that 
true training in American citizenship can be secured only 
by a properly correlated knowledge of the economic, civic, 
and social factors in American civilization. 

H. R. B. 
Philadelphia, Pa., 
March i, 1921. 



TABLE OF CONTENTS 

PART I 
INTRODUCTION 

CHAPTER - PAGE 

I. The Basis of Economics i 

II. The Goal of Economics 9 

III. Economic Ideals 17 

IV. Prosperity 28 

PART II 

PROBLEMS OF CONSUMPTION 

V. The Consumption of Wealth 38 

VI. The Problem of the Standard of Living . . 47 
VII. The Problem of Income 57 

PART III 
PROBLEMS OF PRODUCTION 

Section I. The Factors of Production 

VEIL The Production of Wealth 71 

IX. Natural Resources of the United States . .81 

X. Land Reclamation 93 

XI. Forest Conservation 101 

XII. Water Possibilities 109 

XIII. The Nature of Labor 120 

XIV. The Labor Force of the United States . .129 

ix 



Table of Contents 

CHAPTER 

XV. Economic Aspects of Immigration 

XVI. The Risks of Labor . 

XVII. Problems of Industry 

XVIII. Social and Industrial Education 

XIX. The Nature of Capital . 

XX. The Increase of Capital . 

XXI. Capital and Surplus Wealth . 



/ 



PAGE / 
139 ^ 

I48 

158 
I70 
l80 
I90 
200 



Section II. Production in the United States 

XXII. American Agriculture 

XXIII. The Problem of Soil Fertility 

XXIV. New Forms of Plant and Animal Life 
XXV. Early American Industry 

XXVI. Large Scale Production . 

XXVII. Business Organization 

XXVIII. The Industrial Army 

XXIX. Transportation Agencies 

XXX. Regulation of Railroads 

XXXI. Efficiency in Production 



209 
219 
226 

233 
243 
253 
265 

273 
284 
297 



PART IV 
PROBLEMS OF EXCHANGE 

XXXII. Value and Price 3*5 

XXXIII. Price and Monopoly 3 2 5 

XXXIV. Money Problems 336 

XXXV. Credit and Banking 349 

XXXVI. Modern Finance 362 

XXXVII. International Trade 372 

XXXVIII. Taxation 385 



Table of Contents 



XI 



PART V 
PROBLEMS OF DISTRIBUTION 

CHAPTER 

XXXIX. A Survey of Distribution 

XL. The Theory or Rent 

XLI. The Theory of Wages 

XLII. The Theory of Interest 

XLIII. The Theory of Profits 

XLIV. The Outlook for Labor 



PAGE 

396 
408 
419 

431 
442 

453 



PART VI 

PROBLEMS OF ECONOMIC REFORM 

XLV. Experimental Programs 463 

XL VI. The Program of Labor 476 

XL VII. The Program of Regulation .... 488 

XL VIII. Programs of Nationalization .... 500 

XLIX. Economic Reform and Social Progress . .516 

Index 527 



AMERICAN ECONOMIC LIFE 

PART ONE 
INTRODUCTION 

CHAPTER I 
The Basis of Economics 

I. Meaning of economics 
i . What it studies 
2. Kinds of wealth: 

a. Material wealth 

b. Immaterial wealth 

II. Characteristics of material wealth 
i . It is exchangeable 

2. It satisfies human wants 

3. It involves labor 

III. Free gifts of nature and economic goods 

1. Meaning of free gifts 

2. Meaning of economic goods 

3. Position of money 

4. Conclusion 

Meaning of Economics. — The commanding position of 
economics in the world to-day and its vital connection 
with American life make it highly desirable for what it 
all wide-awake people to understand something studies, 
of this subject and to grasp clearly the basis upon which it 
rests. Economics arises from the study of material wealth 



2 American Economic Life 

and investigates the problem of welfare. Welfare, from 
the standpoint of material well-being, is not possible with- 
out material wealth. Therefore, in order to understand 
the concrete basis of economics, we must have a clear con- 
ception of the meaning of wealth. 

Wealth may be either material or immaterial. For 
example, houses, factories, food, and clothing are articles 
of material wealth ; while health, capacity, and 
wealth: character are illustrations of immaterial wealth. 
Material and Both kinds of wealth possess value, but im- 
material differs from material wealth in that it 
cannot be subjected to the process of exchange ; that is, 
immaterial wealth cannot be bought and sold like food 
and clothing. It is needless to say that immaterial wealth 
is of greater value than anything else in life. However, 
a study of this kind of wealth does not properly belong to 
the field of economics, but is a legitimate part of the science 
of education, or of psychology, or of ethics, or of some 
similar study. Nevertheless, when immaterial wealth is 
productive of material wealth, economics becomes indirectly 
interested in the solution of some of its problems. For 
example, if education produces efficiency and if efficiency 
results in the production of material wealth, economics 
acquires an indirect but vital interest in the growth of 
education. That is, just as wealth is a means of promoting 
welfare, so may education increase the amount of wealth 
produced by society. 

Characteristics of Material Wealth. — Since economics 
is primarily concerned with material wealth, it is imperative 
it is ex- for the student of economic problems to have a 
changeable. c j ear conception of its essential characteristics. 
In the first place, material wealth may be bought and sold ; 



The Basis of Economics 3 

that is, its ownership may be transferred from one in- 
dividual to another. We have just seen that this char- 
acteristic distinguishes material wealth from immaterial 
wealth. The strength of a Hercules, the genius of a 
Shakespeare, or the honesty of a Lincoln can never be 
transferred from one person to another. On the other 
hand, the palaces of kings, the paintings of old masters, 
or the products of a steel mill may easily pass from the 
hands of one into the possession of another. It is always 
possible, therefore, for material wealth — no matter what 
its character or how high its value — to be exchanged for 
some other commodity of equal value. 

But material wealth possesses something more than this 
element of transferability or exchangeability ; it possesses 
the quality of satisfying human wants. Some It satisfies 
things are easily transferred from one person to human 

wflnts 

another, or from one place to another, and yet 
do not satisfy any individual want. For example, the dirt 
of the street is only too easily brought into the home, 
but it is not material wealth because it satisfies no one's 
want. However, this same dirt, needed by the contractor 
in large quantities, would satisfy an individual want and 
would in this case be regarded as material wealth. This 
want-satisfying quality possessed by material wealth is 
called utility. While degrees of utility possessed by 
different articles may vary greatly, yet all forms of material 
wealth must possess some utility. It may readily be 
seen that the necessaries of life, such as food, housing, and 
clothing, possess the greatest possible utility ; that is, they 
satisfy wants that are most intense and universal in all 
mankind. On the other hand, automobiles, books, or fine 
pictures satisfy wants that individuals have gradually 



4 American Economic Life 

acquired, but that are not absolutely essential to life 
itself. In both cases, however, these different forms of 
material wealth possess utility ; that is, they all satisfy, in a 
greater or less degree, the wants of mankind. 

In addition to the qualities of exchangeability and utility, 
material wealth must possess still another characteristic, 
it involves The wealth with which economics is primarily 
labor. concerned must involve human effort. Loco- 

motives, footballs, chemical apparatus, maps, textbooks, 
clothing, and thousands of other commodities are all 
produced by man's conscious industrial effort; that is, 
they are all " economic goods." In the same manner, in 
the production of commercial coal and iron and in the work- 
ing up of other raw materials of industry, man's labor is an 
essential element in the process required for developing 
the finished product. When this element is lacking, the 
goods are not economic but free. 

Free Gifts of Nature and Economic Goods. — When in- 
dividuals appropriate gifts of nature, such as forests and 
Meaning of minerals, they transform them through their 
free gifts. industrial effort into economic goods. On the 
other hand, such free gifts of nature as air and sunshine 
cannot easily be appropriated, and, although they possess 
the highest possible utility, their existence is not the result 
of any human effort. Air and sunlight are not manu- 
factured; therefore, we cannot properly regard them as 
economic goods. Water, on the other hand, while a free 
good in primitive society, becomes an economic good in 
the modern city, because human effort has been expended 
in building aqueducts, laying water mains, and in other- 
wise providing machinery for a water supply. Free gifts 
of nature tend to become economic goods ; but, so long as 



The Basis of Economics 5 

they remain " free," they do not constitute a part of that 
wealth with which the study of economics is primarily 
concerned. The main interest of the student of economics 
is, therefore, in economic goods. 

From our previous analysis of wealth it may be seen that 
material wealth is a term applied to all economic goods ; 
that is, to all those goods (1) which possess the 
power of exchangeability or the quality of trans- economic 
ferability of ownership, (2) which possess utility g0 ° s " 
or the power to satisfy human wants, and (3) which involve 
human labor or industrial effort. They are distinguished 
from free gifts of nature chiefly by reason of the fact that 
human labor has been expended upon them. But when 
man acquires ownership in natural gifts and expends labor 
upon them, they become economic goods because their 
ownership may be transferred from one person to another. 
This is at present the case with land in all highly civilized 
societies. Furthermore, the term economic goods is some- 
times made to include not only commodities, such as wheat 
and petroleum, but personal services, such as those rendered 
by physicians, lawyers, and teachers. These personal 
services are treated by the economist as economic goods 
because, while they are not actually transferable, they may 
be offered for sale in every business community, that is, 
they may be exchanged for money. 

The beginner in the field of economics must bear in 
mind not only this concept of economic goods, but he must 
also clearly understand the relation between position of 
wealth and money. One of the first errors into mone y- 
which he is likely to fall is the belief that these two are 
synonymous, and that, therefore, a study of economics 
is merely a study of " How to make money." Such a 



6 American Economic Life 

misconception should be immediately corrected. Material 
wealth includes infinitely more than money, and the study of 
economics is therefore infinitely broader than an ordinary 
lesson in money-making. The popular misconception of 
the importance of money arises from the simple fact that 
money is employed by civilized societies as a standard 
for measuring the value of all economic goods and as a 
means of exchanging one form of wealth for another. Gold 
and silver, from which money is coined, are forms of 
material wealth; but so are iron and coal, furniture and 
clothing, food and drink, books and pictures, and countless 
other economic goods. It is, therefore, just as absurd to 
think of money as inclusive of all wealth as to think of 
one individual as embracing the human race. 

Material wealth, then, is the concrete basis of economics. 

Without material wealth no science of economics would 

be possible. But a knowledge of wealth, in and 

Conclusion. . . . . ' 

of itself, is not the highest aim subserved by a 
study of economics. Wealth is but a means to welfare, 
and the real purpose of the study of economics is to under- 
stand how welfare may be promoted through the medium 
of wealth. Accordingly, in our treatment of American 
economic life, we shall discuss (i) the ideals necessary to 
attain this goal of welfare ; (2) the means of promoting 
welfare through the consumption, production, exchange, 
and distribution of wealth ; and (3) the organized efforts 
of men to attain the economic goal for which society is 
striving. 

QUESTIONS FOR RECITATION 

1. What is economics? What is its distinctive characteristic? 

2. Explain the difference between material and immaterial 
wealth. Is the gap between them impassable ? 



The Basis of Economics 7 

3. In what two respects are material and immaterial wealth 
alike? 

4. Give two examples of immaterial wealth which might legiti- 
mately command the interest of the student of economics. Explain 
clearly. 

5. Describe the characteristics of material wealth. Give an 
example of each. 

6. What is the difference between free goods and economic 
goods? Give illustrations. 

7. What is the relation between material wealth and money? 
Which is the more important ? Why? 

8. Discuss the relation between wealth and welfare. Which, if 
either, of these two ideas is more beneficial to society? Show by 
citing examples of each. 

9. Must material wealth always possess the three characteristics 
mentioned in the chapter ? Why ? 

10. Why are houses regarded as economic goods? Can they be 
transferred ? 

11. Why are economic goods sometimes made to include personal 
services? Are they exchangeable ? 

PROBLEMS FOR DISCUSSION 

1. Compare the physical sciences with the social sciences, giving 
examples of each group and showing wherein the two groups differ. 

2. Distinguish, by giving examples, between the problems of: 
a. Economics and history, b. Economics and civics, c. Economics 
and sociology. 

3. Discuss the effects of the World War upon the study of eco- 
nomics. 

4. Explain clearly which of the following are, and which are not, 
economic goods : 

a. Fish in the sea. g. Air in the classroom. 

b. Manhattan Island. h. Air in a submarine. 

c. Dandelion on the lawn. i. A school building. 

d. A prison. j. Climate. 

e. Opium. k. A barber's services. 
/. Niagara Falls. /. Poison gas. 



8 American Economic Life 

5. Discuss the relative importance of money, roads, and food. 
Which could a nation do without the better? Why? 

6. Name an American preeminent in wealth production; name 
another whose life has been devoted to the promotion of welfare. 
Discuss the services rendered by each to the community. 

7. Is knowledge transferable? Is it material or immaterial 
wealth ? What has the teacher for sale ? 

8. Explain the meaning of utility. Discuss its relation to ma- 
terial wealth. Is everything that possesses utility an economic 
good? 

9. Name some things which are economic goods at one time, 
but not at another time. Tell why in each case. 

10. Why is industrial effort a necessary characteristic of economic 
goods ? 

SUPPLEMENTARY READING 

Clark, J. B. The Philosophy of Wealth, Chaps. I and III. 
Clay, H. Economics for the General Reader, Chap. XXIII. 
Ely, R. T. Outlines of Economics, Chaps. I and VII. 
Gide, C. Principles of Political Economy, pp. 1-43. 
Seager, H. R. Introduction to Economics, Chap. I, pp. 1-2. 
Thompson, C. M. Elementary Economics, Chap. I. 



CHAPTER II 
The Goal of Economics 

I. What is our goal? 
i . In play : 

a. Success 

b. Achievement 

2. In life : 

a. The production of wealth 

b. The promotion of welfare 

3. The old view and the new 

II. How to attain this goal 

1 . Through opportunity : 

a. Its meaning 

b. Its possibilities in America 

c. Its real significance : 

(1) The older attitude 

(2) The newer view 

(3) An example 

2. Through adjustment : 

a. Its meaning 

b. Its existence in nature 

c. Its never-ending character 

d. Conclusion 

What is Our Goal ? — A football team may aim to pile 
up a big score, or it may aim to play a good game. The 
big score is success ; the good game is achieve- i n p i ay : 
ment. The team that aims to pile up big Success or 
scores wants games with weak opponents; achievemenL 
but the team that aims to play a good game desires in its 

9 



io American Economic Life 

adversaries equal, if not greater, skill. The " big-score " 
team triumphs, while the " good-game " team learns. The 
latter may lose every game of the season, and yet attain a 
proficiency in football far above that of the former team. 
It is thus entirely possible to play ball for scores, or to 
play for the love of a good game. Exactly the same 
in life- The possibilities present themselves in the economic 
production world, except that the choices are rather more 

of wealth. , , 

numerous and complex. Here a man may 
strive for money, the counters of the economic game, and, 
like the miser, hoard them and gloat over them. Or he 
may overlook the counters and work for the things which 
the counters represent, — the wealth of society. In his 
struggle for the accumulation of this wealth, he may 
disregard the rights of others and put to shame his own 
ideals. His one aim may be to amass a great 'fortune, to 
possess great riches. If his purpose is merely to produce 
vast wealth, simply for the sake of that wealth and without 
regard for the rights of others; he is on the same moral 
plane as the ball player who is determined to win the 
game at any cost, even to the " spiking " of his opponent. 
Many men, however, have as the chief object in life the 
attainment of progress, — a forward movement of the 
The entire group to which they belong. If a large 

promotion group is striving for progress, civilization will 
be advanced and the welfare of each member 
of the group will be promoted. Of course, in order to 
attain this welfare, it will be necessary to use money and 
wealth in order to satisfy the wants of the individual; 
yet there is just as wide a difference between working for 
wealth and working for welfare as there is between playing 
ball for scores and playing to play a good game. In the 



The Goal of Economics n 

first case man works for counters ; in the second, for 
development. 

Economics is not merely " the science of wealth," but 
is becoming more and more " the science of welfare." 
The early idea of economic writers was that The old view 
economic goods are the logical end of economic and the new. 
endeavor ; that the nation which is producing economic 
goods in great abundance is a successful nation, irrespective 
of any other test. The newer view holds, on the other hand, 
that true advancement lies, not in the production of goods, 
but in developing the lives of men and women ; and that, 
while this end may sometimes be achieved through the 
production of wealth, the production is merely incidental 
to the development of manhood and womanhood. Produc- 
tion is not an end in itself, but merely a means to welfare. 

How to Attain This Goal. — Since the attainment of 
welfare — individual and social well-being — is the end 
of economic endeavor, it becomes the duty of society to 
provide the means to attain this end. Many conditions 
are needed to realize the goal of welfare, but there are two 
requisites of progress which appear fundamental. In 
order that man may attain that for which he is striving 
society must (i) provide opportunity for the individual, 
and (2) make the adjustments necessary for his progressive 
development. 

Opportunity is an equal chance given to the members of 
each generation to become unequal. Far from signifying 
equality, opportunity involves only the thought Through 
that each person shall have an equal start, opportunity: 
The "starter," who shoots the pistol for the Its ™ ean ™s- 
mile run, does not make the runners equal when he insists 
that each start at the same time from the same mark. On 



12 American Economic Life 

the contrary, he gives the contestants a fair chance to show 
how unequal they are. Those who urge the necessity of 
opportunity are doing no more than the " starter," — 
insisting that each contestant in the race of life shall start, 
fully prepared, with an equal chance to do good work. 

As a nation, America to-day presents rare opportunities. 

Contrast, for a moment, the conditions of the eighteenth 

century with those of the twentieth. In 1700 

Its posst- , # ' 

unties in capital was scarce, living was precarious, and, 
in order to secure even the bare necessities of 
life, men, women, and children were forced to work hard 
and continually. To-day, however, the inhabitants of the 
United States have stored-up capital and a well-developed 
system of wealth production. The bare necessities of life 
and some of the comforts as well, can be supplied in an 
eight-hour working day for adults, while the children 
attend school. In 1700 the possibilities for opportunity 
were limited ; to-day they have increased a hundredfold. 

The real significance of this new opportunity is made 
clearer by the modern view of man's possibilities. Modern 
its real sig- science justifies the belief that, within racial 
nificance. lines, most men are born approximately equal 
and normal; hence opportunity is the chief factor in 
human development. But this view was not always held. 
Even to-day some people believe in total depravity. 
Under this hopeless view of the human race, some men are 
depraved, sinful, wicked; others are shiftless, lazy, in- 
efficient, and poor ; while only the fortunate ones are wise, 
capable, and efficient. During the centuries when this 
view was prevalent, birth was looked upon as the deter- 
mining factor in human development. This attitude 
toward life was an attempt to justify existing conditions ; 



The Goal of Economics 13 

it led to submission and despondent resignation. It was 
all but fatalistic. 

In the course of time, however, thinkers arose and 
proclaimed the doctrine of man's natural capacity. Such 
men talked of the right to life, liberty, and the pursuit of 
happiness, and asserted that all men are created free and 
equal. Equalize opportunity, proclaimed these " free 
and equal " thinkers, and, to a great extent, you equalize 
achievement. Birth — heredity — was no longer the key 
to the situation ; this was now to be found in opportunity 
and environment. This view of human life is full of prom- 
ise and inspiration, transforming men from fatalists into 
enthusiastic workers. According to its teaching, perhaps 
nine-tenths of all men and women, in a given grade of 
civilization, are born with about the same capacity to do 
good work. 

Take, for example, two boys of equal ability, born on the 
same day. In the course of their lives, one is sent to high 
school and college and does splendid work in the world; 
the other is badly fed, poorly clothed, and sent into a 
cotton factory at an early age. The first boy, because he 
had a chance, developed in exactly the same way that the 
second boy would have developed had a chance been 
given to him. An overwhelming majority of people, like 
these two boys, are normal at birth and, if given an oppor- 
tunity, will lead normal, happy lives. 

To make opportunity more effective, society must make 
certain changes in ideas and conditions that have been 
inherited from a far distant past. This process Throug h 
of changing past conditions so that they will adjustment: 
meet man's present needs is called social adjust- Iis meanm Z' 
ment. For example, it is not sufficient that society pro- 



14 American Economic Life 

vide young men and women with an opportunity for edu- 
cation. This education itself must suit the needs of the 
present-day individual. If the education offered is out of 
harmony with the needs of the time, the opportunity pro- 
vided fails of its real purpose. Under such circumstances 
society must make an adjustment in education; that is, 
it must change, for this work-a-day world, the old idea that 
education must always take the form of pure culture and 
learning. In other words, our educational system must be 
reorganized if it does not meet the requirements of the new 
age. This is accomplished by the process of social adjust- 
ment which aims to bring about a normal relation between 
man and his social environment. However, it is the environ- 
ment, not the individual, which suffers this change. The 
aim of social adjustment, therefore, is to change unfavor- 
able conditions so that men and women may be free, when 
provided with opportunity, to realize life's full possibilities. 
The phenomenon of adjustment is seen in nature as well 
as in society. A river, for example, adjusts itself to the 
its existence changes in earth formation. If a mountain 
m nature. ra nge is thrown up, the river wears down its 
bed until, flowing at a normal gradient, it has created 
a canon of the Colorado. But the river is not content. 
It continues its work, cutting away the surrounding hills, 
until it flows through a great plain like the Mississippi 
Valley. Society, like the river, seeks to adjust itself to 
the changing contour of the environment by wearing it 
away, and smoothing it down, until a normal relation is 
established between men and their surroundings. It 
accomplishes its purpose by means of men and women 
all working together, cooperating to remove the obstacles 
in the path of progress. 



The Goal of Economics 15 

The process of adjustment is continuous because the 
normal is always changing. The unattainable of one age 
is the attainable of the next. Through science, , 

Its never- 

invention, education, and the creation of surplus ending char- 
wealth, the dreams of the past, — the abolition of 
slavery, freedom from overwork, from cold and hunger, from 
famine and pestilence, — become the realities of the present. 
Thus the possibilities of human life are ever widening. 

Men and women, therefore, who have the welfare of 
society truly at heart are continually striving to shape 
social conditions so that every one may be 

Conclusion. 

happiest and most effective. If enough people 
work for such an end, the full possibilities of society will 
be realized and the normal for that community will be 
attained. But to arrive at this goal of economic life — 
to realize individual and social welfare — society must 
not only secure adjustment, but it must also provide 
opportunities for all its members. 

QUESTIONS FOR RECITATION 

1. Do you want your school teams to win at any cost? Ex- 
plain your answer. 

2. Is it possible to attain both success and achievement ? How? 

3. Explain the difference between the production of wealth and the 
promotion of welfare. Show how the former is necessary to the latter. 

4. What has economics to do with the promotion of welfare? 
Was this view always held? 

5. Define opportunity. 

6. Give original examples of opportunity. 

7. Explain the possibilities for opportunity in the United States. 
What has the United States yet to accomplish in this direction ? 

8. Why do modern views of life enhance the importance of op- 
portunity? Explain clearly. 

9. Define social adjustment. Give examples. 



1 6 American Economic Life 

10. How is it accomplished ? 

ii. How does Nature bring about physical adjustment? Give 
examples. 

12. Show clearly why the process of social adjustment is never- 
ending. 

13. At what periods in our history have we had the most important 
social adjustments ? Why ? 

PROBLEMS FOR DISCUSSION 

1. Discuss life's true goal. Give examples from great men of 
history. 

2. What good does the miser do society? The tight-fisted 
business man ? The public-spirited worker ? 

3. What choices in life are open to you? Which will you take? 
Give your reasons. 

4. Would you, or would you not, be willing to take an easy job 
with a big salary ? Why or why not ? 

5. What great industrial leader appeals to you ? Why? 

6. Contrast your present opportunities with those that would 
have been open to you had you been born in China. 

7. Should any limit be placed on opportunity? State your 
reasons. 

8. Would not the opportunity of the few be limited if opportunity 
were provided for the many ? Explain. 

9. Contrast individual with social adjustment. Give examples. 

10. Explain the most important social adjustments needed in 
America to-day. 

11. Contrast India with the United States in regard to social 
adjustments. Give examples. 

12. How do you regard prohibition and woman suffrage ? Why ? 

SUPPLEMENTARY READING 

Clay, H. Economics for the General Reader, Chaps. XXIV-XXV. 

Devine, E. T. Social Forces, Chaps. I, V, and VI. 

Jenks, J. W. Governmental Action for Social Welfare, Chap. I. 

Pigou, A. C. Wealth and Welfare. 

Ross, E. A. Sin and Society, Chap. VI. 

Seager, H. R. Social Insurance, Chaps. I and VI. 



CHAPTER III 

Economic Ideals 

I. Efficiency 

i. Its meaning 

2. Its importance : 

a. To the employer : 
(i) Examples 

(2) How measured 

b. To the worker : 

(1) Grades of workers 

(2) A great danger 

c. To the nation : 

(1) Why necessary 

(2) An example 

d. To the family : 

(1) Why important 

(2) The new movement 

3. How secured 

II. Conservation and thrift 

1. Meaning of conservation 

2. Its threefold aspect : 

a. Conservation of natural resources 

(1) Forests 

(2) Minerals and water power 

b. Conservation of industry 

c. Conservation of vitality : 

(1) Health 

(2) Life 

3. Thrift: 

a. Meaning and necessity 

b. The great gain 

4. Conclusion 

17 



1 8 American Economic Life 

Efficiency. — Efficiency is the capacity to secure a 
maximum return for a minimum outlay. Hence, one man 
is more efficient than another if, with a given 
expenditure of energy, time, and material, he 
can produce a larger or better result than the other. For 
example, where two men are making Belgian blocks, one 
produces sixty, while the other, during the same period 
of time and without putting forth any additional effort, 
makes a hundred. The first man is clumsy with his 
hammer; the second makes every blow count. The 
second man is therefore more efficient than the first. 

Every progressive employer is interested both in his 
own efficiency and in that of his workmen. In fact, the 
Tx . efficiency of his employees is a measure of his 

Its unpor- J r j 

tance : To own capacity ; for, unless he secures a maximum 
t e emp oyer. return f or a m i n i mum outlay of administrative 

ability, he himself is inefficient. If he has a man soldering 
lanterns who makes ten motions to the lantern, while the 
job can be done in eight, he is losing some product every 
hour of the day through this man's inefficiency. Or, if he 
is using old, out-of-date machinery when more effective 
machinery can be secured, or if his business has not been 
scientifically systematized, he is inefficient because he is 
failing to secure a maximum return for a minimum outlay. 
So important has become this principle of efficiency that 
the success of the business man is measured in terms of this 
principle. The term " scientific management of industry " 
is employed to denote the extent to which this principle is 
recognized in the management of large undertakings. The 
old haphazard way of doing business has disappeared from 
all progressive establishments. Large sums of money 
are paid for the services of "efficiency experts," whose duty 



Economic Ideals 19 

it is to devise the most effective methods of conducting 
the business and turning out the product. Workers 
themselves are tested by tracing their curves of efficiency, 
so that production may reach its greatest volume. Indeed, 
in modern large-scale production, one of the chief functions 
of the head of a great organization is to find " the right 
man for the right job " in order that the best and the great- 
est industrial results may be achieved. 

The worker is no less interested in efficiency than his 
manager, because his welfare is equally dependent upon 
it. Workers are divided into groups, whose xo the 
boundaries are measured in terms of efficiency. worker - 
At the bottom are those who are living on the ragged edge 
of existence, who are always losing their positions because 
of their inefficiency. Then come those who " stick," who 
retain their positions but never rise. Next come those 
who advance, but slowly. Finally, at the top, are those 
workers who are always advancing and progressing because 
they are always increasing their efficiency. 

It is well here, however, to remember that the ideal of 
efficiency, like many other desirable principles, may be 
subverted to wrong purposes. This occurs in what is 
known as the " speeding up " process, in which the health 
of the workers is sacrificed for increased production. 
Efficiency secured at the cost of human health and happiness 
is not efficiency at all. By breaking down the worker and 
thus ultimately curtailing his power of production, such 
so-called efficiency defeats the very purpose for which the 
true ideal exists. The immediate product, therefore, is 
not always the true test of , real efficiency. 

Efficiency may also be considered from the standpoint 
of the nation. Uncle Sam may well ask, " Is this country 



20 American Economic Life 

efficient? Are all our industries doing efficient work? 
Are our railroads efficiently managed? Is our school 
system an efficient one?" 

But why these questions ? 

Because, in the general reorganization of international 
industry necessitated by the changes of the World War, 
To the it is imperative for the United States, if she would 

notion. realize the full possibilities of the new era, to 

stand first in national efficiency. In the struggle for world 
markets and in the demand for increased production, the 
United States can attain the commanding position, which 
her natural wealth justifies, only by insisting upon the 
highest ideals of national efficiency. Production must 
reach the largest volume consistent with national well- 
being; goods must be efficiently distributed through the 
arteries of commerce ; foreign trade must be organized 
in the most effective manner ; and industrial education 
must reflect the ideals of the new period. 

Many good illustrations of what has been accomplished 
through national efficiency may be taken from American 
industries which have really reached the stage of inter- 
national organization. One of the greatest of these is the 
United States Steel Corporation. In this business, indus- 
trial efficiency has attained such a high degree of develop- 
ment that world markets have been provided for its prod- 
uct. American steel rails not only compete with the 
English product, but at times drive that product from its 
home market. But here again, we should remember that 
such a dominating position ought not to be attained 
through false efficiency that disregards the best interests 
of the labor employed in the industry concerned. 

Finally, we may look at efficiency from the standpoint 



Economic Ideals 21 

of the home. If it is necessary that the father be able to 
produce efficiently in order to support his children, it is 
no less necessary that the mother buy and keep To the 
house efficiently, in order that the income of f amU y- 
the father may be used in the most advantageous manner. 
Efficiency in the home is just as important as efficiency in 
the factory, — more so, perhaps, in view of the many bad 
digestions and spoiled dispositions that have grown up 
with inefficient home management. 

Many evidences are seen to-day of attempts to secure this 
efficiency in the home. In our educational system the 
movement extends all the way from the primary system to 
the institutions of higher learning. In the elementary 
schools we find courses in cooking and sewing ; in the high 
schools, domestic science courses ; and in the colleges and 
universities, courses in chemistry, food-values, and allied 
subjects. Household budgets are studied so that limited 
funds may be spent to the best advantage, while among 
social workers special attention is paid to giving informal 
instruction to families of the poor in " household efficiency/' 

No matter, therefore, from what standpoint we view this 
question we see its far-reaching importance ; and it acquires 
this importance because social welfare depends 
largely on efficiency. When a nation is effi- efficiency 
cient, producing many goods cheaply and easily, 
it creates the possibility of universal prosperity in which all 
may share. How, then, may this efficiency be secured? 
An analysis of this problem will show that education alone 
can make certain the realization of this ideal. Here, 
however, it may be necessary to revise our ideas of educa- 
tion. Certainly the efficiency for which we are striving 
cannot be secured from that traditional idea of education 



22 American Economic Life 

which exalts culture at the expense of useful knowledge. 
By education for efficiency we mean that technical and 
specialized training which every individual must possess 
in order to discharge life's imperative duties. 

Conservation and Thrift. — Conservation means wise 
use. It is the complement of efficiency. Efficiency is 
„ . ; measured by a maximum of results ; conserva- 

Meaning of 

conserva- tion, by a minimum of waste. For example, in 
former days, when business was conducted on a 
small scale, each establishment had a certain amount of 
waste product that was discarded as useless. Now the 
giant corporation utilizes wisely this former waste, so that, 
by proper conservation, it is converted into valuable by- 
products of industry. 

In the public mind, however, conservation is most 
closely associated with our natural resources. Here it was 
its three- that Theodore Roosevelt idealized this move- 
fold aspect: men t in American life. He saw at once the 
great danger to the nation that would result from the 
wanton waste of natural resources and from their exploita- 
tion for private gain. He brought the nation to a realizing 
sense of the great danger confronting it and, thereby, saved it 
from becoming victimized to extravagant waste and private 
monopoly. But the term conservation may be applied not 
only (i) to natural resources, such as minerals, forests, and 
water power, but also (2) to industry, and (3) to vitality. 

The conservation of natural resources began with the 

care of forests, which were so ruthlessly destroyed from 

colonial times to the end of the nineteenth cen- 

Conservation 

of natural tury. Forests had been literally " butchered," 

— all trees, young as well as old, being cut or 

destroyed. Then, too, forest tires of terrible proportions 



Economic Ideals 23 

raged every year throughout different areas, destroying 
lives and property, as well as completing the forest de- 
struction which the timber butchers had begun. Gradually, 
as the forests disappeared and the price of lumber rose, it 
became apparent that, unless the forest waste was stopped, 
a time would come, and that very shortly, when there 
would be an appalling shortage of lumber. 

Although the idea of conservation of natural resources 
related originally to forests, it has been expanded until, 
to-day, the nation is fully aroused to the necessity of con- 
serving all of its natural wealth. Forests, even if per- 
manently destroyed, might be replaced, but minerals are 
not replaceable; and water power, upon which industry 
must more and more depend as coal rises in price, may be 
monopolized and taken out of the hands of the people. 
Everywhere, therefore, conservation is essential. 

Industry, too, offers opportunities for the conservationist. 
For years, mining companies threw carelessly aside the 
finer bits of anthracite coal which have since conservation 
proved of such value in making steam for office °1 tndustf y- 
buildings and factories. The refuse from slaughterhouses, 
formerly thrown away, is now converted into a score of 
different kinds of products in great packing houses that 
" use every bit of a hog except the squeal." Hoofs, horns, 
hair, bristles, bones, blood, sinews, fat, hides, intestines, — 
all have some destination ; while the refuse which remains 
is converted into fertilizer. New inventions, perfected 
devices, new processes of manufacture, all help in the 
conservation of industry. 

Most important of all is the conservation of human life. 
Long ago Ruskin pointed out that men and women are a 
nation's greatest asset. So long as children are sacrificed 



24 American Economic Life 

to factories, so long as men and women toil at the expense 
of health and rightful development, and so long as the 
Conservation public health is sacrificed to ignorance, man will 
of vitality. never attain the goal of welfare. Hence, if a 
nation would be truly efficient and happy, it must use 
wisely the men and women of each generation. This 
conservation of vitality may take the form of conserving 
health or of conserving life. 

If sick people cannot do their best work, a nation of sick 
people can scarcely be described as efficient. In the 
United States, it has been estimated that the average 
adult is sick in bed four or five days during each year; 
while headaches, colds, and such minor ailments keep him 
from work another three or four days. If, then, there are 
thirty million adults at work and each one loses seven 
days a year, the total loss, irrespective of the loss of health 
and the cost of drugs and medical attendance, is two hun- 
dred and ten million working days each year. If half of 
this sickness is preventable, the nation is deliberately 
losing more than a hundred million working days annually 
because of its failure to adopt the simplest health pre- 
cautions, such as clean water, pure milk, clean streets, and 
airy houses. 

In the same way, the average length of life might be 
greatly increased by preserving health and preventing 
accidents. Perhaps half of the deaths occurring annually 
in the United States are preventable and would be pre- 
vented if a wise conservation policy were adopted. At 
present, the average length of life in the United States is 
from thirty-five to forty years. It might be seventy. 

Another form of conservation is found in the ideal of 
thrift. With the advent of the World War in 1914, this 



Economic Ideals 25 

ideal came to occupy a prominent place in American 
economic life. As the struggle progressed, it became in- 
creasingly evident that the United States would _ ., 

& J Thrift: 

have to send food and other necessary supplies to Meaning 
those European nations that were fighting to and 

, , , . , , necessity. 

maintain the supremacy of democratic ideals. 
To do this, it was necessary for the nation to practice 
economy and to use wisely its abundant wealth. Every- 
where was seen the slogan " Food will win the war." 
The nation learned anew how to save by practicing 
economy and by submitting to voluntary rationing. 
When the war was won, the depletion of the world's re- 
sources further emphasized the need of thrift. The neces- 
sity to " work and save " became still more apparent to 
all thoughtful men. 

The great gain to the American people from this lesson 
of war was found, not only in curbing social extravagance, 
but also in the general discovery of the practical The greai 
value of the power of substitution. Heretofore, gain - 
men had become accustomed to use such staple articles 
of food as wheat, beef, and sugar, and to feel that no 
other foods could serve as substitutes for them. With 
continued practice, however, they soon came to realize 
that corn could be substituted for wheat, pork for beef, 
sirup for sugar, and rice for potatoes. 

From this general survey of efficiency, conservation, and 
thrift, the student of American economic life must see 
the tremendous importance of individual action xhe con- 
in promoting social welfare. It is not sufficient clusion - 
for society to provide men and women with opportunities ; 
nor yet to make the adjustments, in order that the oppor- 
tunities offered may meet the needs of the present time. 



26 American Economic Life 

These are only the first steps toward the attainment of 
social welfare. The individual himself must hold to high 
standards of efficiency; he must insist upon high ideals 
of conservation ; and he must practice economy and thrift. 
In spite of all that society may do for him, if man is 
inefficient, extravagant, or wasteful, he will never attain 
the goal of economic welfare. 

QUESTIONS FOR RECITATION 

i. Define efficiency. 

2. What is meant by a "maximum return"? 

3. What is the difference between true and false efficiency? 

4. Give examples of false efficiency. 

5. Give examples of true efficiency. 

6. Explain the importance of efficiency to : 

a. A railroad president. 

b. A salesman. 

c. The modern housewife. 

d. The national government. 

7. Define conservation. Name three kinds. 

8. Why is conservation needed? 

9. Give examples of conservation. 

a. In natural resources. 

b. In vitality. 

c. In industry. 

10. If conservation benefits the future only, how can it be justi- 
fied? 

11. What is thrift? 

12. Is the miser thrifty? Explain. 

13. Why is thrift necessary? 

PROBLEMS FOR DISCUSSION 

1. Discuss the relative importance of different economic ideals 
in the United States to-day. 

2. Compare idealism with materialism as a factor in national 
development and in world politics. Give examples from history. 



Economic Ideals 27 

3. Compare British efficiency with American efficiency. Give 
examples. 

4. Discuss the idea of German efficiency before the World War. 

5. Give the history of the conservation movement in the United 
States. 

6. Discuss the evils of the private monopoly of mineral lands 
and water-power sites. 

7. Apply the principle of conservation to mankind. 

8. Compare France, Holland, and the United States in regard to 
the practice of thrift. Give illustrations. 

9. Discuss the importance of thrift to : 

a. The family. 

b. Industry. 

c. The nation. 

10. Theodore Roosevelt said, "Thrift is common sense applied to 
spending." Apply this to your own everyday expenditures. 

SUPPLEMENTARY READING 

Annals of American Academy of Political and Social Science, The 

New American Thrift, January, 1920. 
Annals. The American Industrial Opportunity, May, 191 5. 
Carver, T. N. Principles of Political Economy, Chaps. VI and IX. 
Taylor, F. W. Principles of Scientific Management. 
Van Hise, C. R. The Conservation of Natural Resources in the United 

States, pp. 1-14, 359-379- 



CHAPTER IV 

Prosperity 

I. Nature of prosperity 
i. Its meaning 

2. Its dangers 

3. Its twofold character 

II. National prosperity 

1 . China and United States : 

a. Population 

b. Race 

c. Natural resources 

d. Industrial development . 

e. Transportation facilities 
/. Tradition 

g. Control over environment : 

(1) In regard to rivers 

(2) In regard to food 

2. Surplus wealth: 

a. Its meaning 

b. Forms 

III. Individual prosperity 

1. Its importance 

2. An example 

3 . Conclusion 

Nature of Prosperity. — Material wealth is the basis of 
national well-being. A people who are inadequately 
its mean- nourished, poorly housed, improperly clothed, 
ing - and denied the legitimate means of securing 

health and recreation, cannot be said to enjoy material 

28 



Prosperity 29 

well-being. This condition can be brought about only 
through the medium of prosperity. Prosperity, therefore, 
signifies an abundance of economic goods. It is an indi- 
cation of welfare ; just as fame and honor are signs of great 
achievement. In this sense, it is an ideal to be realized 
in exactly the same manner as efficiency and conservation. 

In the attempt to attain a condition of prosperity, as 
well as in its actual realization, man is often exposed to 
certain grave dangers. Just as a false efficiency 
may be secured at the expense of the worker, so 
an unbalanced prosperity may be attained at the cost of 
individual well-being. Prosperity may be confined to the 
few, while poverty engulfs the many. Furthermore, 
when this prosperity is once attained it may be made to 
serve wrong purposes ; it may even result in moral degenera- 
tion. In great moral crises, a nation must never think 
simply in terms of material wealth. A prosperous nation 
must be a nation of strong moral fiber, willing to undergo 
temporary sacrifices for the sake of abiding principles. 

Prosperity, therefore, should not be regarded as an end 
in itself; it is merely an instrument for the betterment 
of the human race. Hence, it is important to Its twofold 
distinguish between national prosperity and character, 
individual prosperity. The true material happiness of a 
people depends Upon individual prosperity. It is not 
sufficient that a nation's exports increase in volume, and 
that its competitors be driven from foreign markets. The 
wealth of the nation must be absorbed by the masses 
themselves up to the point necessary for their material 
comfort. First of all, therefore, we shall discuss the basis 
of national prosperity, because from it should naturally 
flow individual prosperity. 



30 American Economic Life 

National Prosperity. — The meaning of national pros- 
perity may be more clearly grasped by a contrast between 
China and the United States. The first is a 

China and 

United land of wants ; the second, a land of plenty : the 

one is a nation of deficit; the other, a nation 
of surplus. Here are two countries — China and the 
United States — equally endowed by nature and yet 
differentiated by the extremes of poverty and prosperity. 
What has brought about this wide divergence ? Why has 
one nation been denied, and why has the other almost 
attained, the goal of welfare? To solve this problem, we 
shall examine briefly these two countries from the stand- 
point of their population, their natural resources, their 
industrial development, and their ideas and beliefs. 

In China there are four hundred million people, or almost 
four times as many as there are in the United States. If the 
whole population of the United States and forty 
millions more were to move into the State of 
Texas, they would be about as close together as are the 
people in the Yang-tse-kiang Valley of China. It would 
not be right, therefore, to charge China's lack of prosperity 
to a scarcity of labor. 

The Chinese belong to the Mongolian race. They are 
physically smaller than the Caucasians of our own land; 
but the experience of the last fifty years in the 
development of Japan, whose people are ad- 
mittedly not above the Chinese in capacity, has shown 
that intellectually the Mongolians are at least the equals, 
if not the superiors, of Western races. Within a genera- 
tion the Japanese acquired a knowledge of industry and 
science that the Western races labored two hundred years 
to develop. In the Russo-Japanese war, the Japanese 



Prosperity 31 

loss through disease was almost nothing; while among 
the Russian troops in that war, the American troops in 
the Spanish- American War, and the British troops in the 
Boer War, the death roll from disease was appalling. This 
is only one instance in which the Japanese have bettered 
their instruction and thereby proved the inherent capacity 
of the Mongolian race. 

China possesses natural wealth equal, if not superior, 
to that of any like area in the world. The country is 
magnificently watered. The Yang-tse-kiang, Natural 
three thousand miles long, is navigable to ocean- resource5 -- 
going vessels for eleven hundred miles. The Hoang-ho, 
two thousand six hundred miles long, is connected with 
the Yang-tse-kiang by the Imperial Canal; and these 
two rivers and the canal form one of the finest water systems 
in existence. The climate of China is very similar to that 
of the United States. Minerals exist in abundance. It 
is believed that the bituminous and anthracite coal fields 
of China contain as much coal as those of all the other 
countries of the world combined. China's poverty, there- 
fore, cannot be attributed to a lack of natural resources. 

In Chinese manufacturing, machinery has not generally 
replaced human energy; consequently only those things 
which will sell at a high price, — such as silks industrial 
and fabrics of various kinds, — are generally devd °P menL 
made. In spite of the fact that the people are apparently 
so naturally capable and numerous,, and the natural re- 
sources so abundant, the industries of China are practically 
undeveloped. Despite its native abundance, iron is im- 
ported, although proper methods could produce iron in 
China as cheaply as in any other place in the world. Coal 
is mined in very limited quantities and by the use of appli- 



32 American Economic Life 

ances so costly and inadequate that only the rich can 
afford to buy it. In her industrial development, there- 
fore, China is immeasurably inferior to the United States. 

Chinese transportation facilities, except on the water- 
ways, are so inadequate that a bulky commodity, like coal, 
T a si>or- c ^ nn °t be shipped for any distance before its 
tation price has become prohibitive to all except the 

very wealthy. This constitutes an important 
factor in China's poverty. For here is a land full of cap- 
able people, abounding in natural resources, but without 
industry and transportation, and therefore in constant 
danger of want. Crop failure in a district remote from 
water transportation means starvation. There are few rail- 
roads ; the roads are bad. People suffer from hunger within 
a few hundred miles of an abundant supply of food, because 
there are no means of transporting bulky commodities. 

It is, therefore, true that the backward condition of 

China is due to a lack of organized industry; but the 

absence of this industry itself is due, in large 

Tradition. . '. 

measure, to a blind worship of custom. My 
father used this tool " is a conclusive argument in the ears 
of the son, and he uses the same tool without question. 
The people of the United States, however, have always 
developed industry irrespective of tradition, because they 
know that only through the breaking of tradition can 
progress sometimes be made. 

Because of the powerful influence of custom and tradi- 
tion upon the Chinese people, national progress and pros- 
• , , perity have not been attained. In the United 

Control over x •' 

environ- States exactly the opposite condition prevails. 

By discarding tradition, the American people 

have developed their resources and controlled their en- 



Prosperity 33 

vironment; the Chinese have not. Instead of letting 
nature dominate them, the people of the United States 
have learned, in a large measure, to dominate nature. 
If the Mississippi overflows its banks, as it sometimes 
does, the people are not drowned by the tens of thousands, 
because, long before the break occurs or the water reaches 
a town, the news of the coming flood has been sent over 
telegraph wires and the people are prepared to meet it, 
or else have left for places of safety. As a rule, however, 
the Mississippi is not allowed to overflow its banks, al- 
though it is in somewhat the same position as the 
Hoang-ho, flowing in a channel which in many places is 
above the level of the surrounding country. 

The control of Americans over their environment may 
be seen in another direction. The Chinese depend upon 
one crop — rice. If the rice crop fails, the Chinese starve. 
The people of the United States, however, do not depend 
upon one crop. A great part of their food is derived from 
wheat ; but through the development of the milling industry, 
the beef industry, the canning and preserving industry, 
and the use of corn, it has been possible to live successfully 
through a national crisis without being in immediate danger 
from starvation. This was clearly demonstrated during 
the period of the World War, when so much American 
wheat was shipped abroad. 

The net result of this power over the physical environ- 
ment — this control of natural resources — secured by 
discarding age-long traditions is the creation in Surplus 
the United States of a vast quantity of surplus wealth: 
wealth. Whereas, throughout the centuries, Meamn &- 
China's traditional methods have barely produced sufficient 
wealth for current consumption, America's enlightened 



34 American Economic Life 

processes of production have created, over and above what 
is needed for present use, vast quantities of economic 
goods for future consumption. That is, in the United 
States, all the products of industry are not consumed at 
once — part is set aside for future needs or for aiding 
future production. This constitutes surplus wealth and 
guarantees national prosperity. 

The development of surplus wealth is one of the great 
steps in civilization. America, as contrasted with China, 
has vast masses of this surplus wealth stored up in 
the form of railroads, factories, machine-shops, 
ships, automobiles, food products, and canned goods. 
These things, accruing year after year, serve to increase 
the productive efficiency of the people and to render them 
more capable of supplying themselves with the goods 
they desire. Not only does this surplus, stored up and 
added to year after year, guarantee the nation against 
starvation and want ; but, in addition, it supplies men with 
the comforts and pleasures of life. Mechanical inventions, 
one form of surplus wealth, have enormously broadened 
man's possibilities of life. 

Individual Prosperity. — Since the true end of national 
prosperity is individual prosperity, national wealth is of 
its impor- little real value unless it is distributed among 
tance. fa e individuals composing the nation. The 

United States is immensely wealthy; great quantities of 
additional wealth are produced each year ; and increas- 
ing capital enlarges the possibilities of future wealth pro- 
duction. But it is not enough to state that the country 
is rich. What becomes of these riches? If a considerable 
proportion of this wealth is concentrated in the hands of a 
relatively small group of people, the average individual 



Prosperity 35 

may be no better off than if this vast surplus of wealth 
did not exist. The nation must pass prosperity around. 

Charles Dickens draws a sharp contrast between national 
and individual prosperity. In " Hard Times," Mr. Mc- 
Choakumchild, the schoolmaster, who is teaching 

♦ An example. 

political economy, says : Now this school- 
room is a nation and in this nation are fifty millions in 
money. Girl number twenty, is not this a prosperous na- 
tion, and ain't you in a thriving state ? " And girl number 
twenty, the daughter of a circus rider, replies that she 
cannot say whether or not it is a prosperous nation, and 
whether or not she is in a prosperous state until she knows 
who has the wealth and whether any of it is hers. 

The United States cannot be truly prosperous and we as 
individuals cannot be well off, unless all of us share in the 
national prosperity. The real test of prosperity The 
must be, not national wealth, but individual conclusion, 
welfare. The goal of economics cannot be attained until 
each individual in society is consuming a sufficient quantity 
of goods to insure him health and productive capacity; 
that is, until his income is sufficient to maintain a standard 
of living consistent with good health arid efficiency. There- 
fore, in order to test the extent of individual prosperity 
in the United States, we shall now turn our attention, in 
the succeeding chapters, to the problems of wealth con- 
sumption. 

QUESTIONS FOR RECITATION 

1. Compare China and the United States in regard to their 
similarities. 

2. Contrast their differences. 

3. What is the fundamental reason for the poverty of the one 
and the prosperity of the other? 



36 American Economic Life 

4. Explain the dangers of national prosperity. 

5. What is surplus wealth ? 

6. State clearly the relation between surplus wealth and national 
prosperity. 

7. Give several forms of surplus wealth in the United States. 

8. What are its good results? 

9. How does it originate? What is the relation between thrift 
and surplus wealth ? 

10. Define prosperity. Explain the two kinds of prosperity. 

11. What does national prosperity primarily desire — wealth or 
welfare ? 

12. Why is individual prosperity so important? 

13. How may individual prosperity be attained? 

14. Why should a nation desire prosperity ? 



PROBLEMS FOR DISCUSSION 

1. Discuss the changes taking place in China to-day. 

2. Show the relative importance of man and nature in creating 
national prosperity. Give illustrations from typical nations. 

3. Show the relation between national adversity and the "one 
crop system." Discuss Ireland in this connection. 

4. What accounts for the backwardness of the Mediterranean 
countries ? 

5. Discuss the effect of war upon surplus wealth. 

6. Discuss the effects of the Industrial Revolution from the 
standpoint of surplus wealth. 

7. Explain surplus wealth in terms of production and con- 
sumption. 

8. Discuss the relation between individual prosperity and the 
problem of the distribution of wealth. 

9. Why, for centuries, has China been called a static society? 

10. Are there any advantages a static society enjoys over a pro- 
gressive society ? If so, name some. 

11. Is the world to-day in a static or a dynamic condition ? What 
are the dangers as well as the advantages of this condition ? 



Prosperity 37 



SUPPLEMENTARY READING 

Carver, T. N. Principles of Political Economy, Chap. VI. 

Ely, R. T. Outlines of Economics, Chaps. V-VI. 

Patten, S. N. The New Basis of Civilization, Chaps. I and II. 

Ross, E. A. The Changing Chinese. 

Shaler, N. S. Man and Nature in America, Chaps. V-VIII. 

Smith, J. R. Commerce and Industry, Part I and Chap. XXXV. 



PART TWO 
PROBLEMS OF CONSUMPTION 

CHAPTER V 

The Consumption of Wealth 

I. The economic life 
i. Its ideal 
2 . How to measure this ideal : 

a. Through the consumption of wealth 
(i) Its importance in childhood 

(2) Its continuous character 

b. Through the production of wealth : 

(1) Why production is vital 

(2) The economic life two-sided 

II. Nature of consumption 

1 . Meaning of consumption 

2 . Kinds of consumption : 

a. Productive consumption : 

(1) Meaning 

(2) Examples 

b. Unproductive consumption : 

(1) Meaning 

(2) Examples 

3. Effect on economic life 

III. Importance of consumption 

1 . How it varies 

2 . Rules of consumption : 

a. Consumption should be regular 

b. Consumption should be varied : 

38 



The Consumption of Wealth 39 

(1) Disadvantages of sameness 

(2) Advantages of variety 
c. Conclusion 

The Economic Life. — It must now be clearly evident 
that life has a distinctly economic background. Food, 
clothing, shelter, and recreation, upon which life so inti- 
mately depends, are the products of economic effort. All 
life is not economic ; there is more than the economic in 
life ; and yet all life is dependent upon the economic for 
its continuance. 

When, therefore, we speak of the economic life we mean 
that life which strives for the attainment of welfare through 
economic means. Welfare may be social or indi- 

. . .ill i I ts ideal. 

vidual, and it is possible that the two may not 
always harmonize. We have seen that a country may give 
evidence of great national prosperity, but that this prosperity 
may not be sufficiently individualized. It is, however, just 
this very ideal of individual welfare that the economic life 
is intended to embody. True social welfare should be 
thought of as including the welfare of all members of society. 

There are, perhaps, two measures of this welfare. The 
first, a measure in terms of the consumption of wealth, 
conceives of welfare as resulting from the satis- How 
faction of economic wants. The second, a meas- measured: 
ure in terms of the production of wealth, conceives of wel- 
fare as resulting from surplus wealth. 

The consumption of wealth is the using of economic 
goods to satisfy human wants. Each child is a consumer. 
For a period ranging from ten to twenty-five Th k 
years, the children born into American homes are consump- 
not producing economic goods at all. During 
this entire period of youth they are maintained through 



40 American Economic Life 

the surplus created by the other workers of the com- 
munity. Every adult, while preparing to produce, has 
passed through this era of consumption. When this con- 
sumption stage is prolonged, when the child's preparation 
for life is very complete, when efficiency has been assured 
by a sufficient supply of economic goods during the forma- 
tive period, individual welfare is conserved and social wel- 
fare promoted, because the long period of consuming 
without producing results in more efficient production in 
later life. 

If youth has been wisely spent, the years of adult life 
should show a large surplus of production over consump- 
tion. This surplus, which the individual owes to the com- 
munity for his early years of maintenance, is used to support 
the children who, in the next generation, devote many 
years to productive training and thus guarantee their 
own efficiency in manhood. For adults, also, the economic 
life is possible only so long as an adequate supply of 
consumption goods is provided. Consumption provides 
the basis for youth and development, but it is no less 
essential to efficiency in adult life and to comfort in old 
age. 

Goods cannot, however, be consumed until they are 
produced. Men cannot eat without working. Children 
Through cannot be kept in school until they are eighteen, 
production, consuming constantly but never producing, 
unless some of the adult producers are creating more wealth 
than they themselves are consuming. The economic 
life on its productive side, therefore, presupposes that the 
producing members of the community are producing 
enough, in addition to the amount that they actually 
consume, to enable the immature members of the com- 



The Consumption of Wealth 41 

munity, and those beyond the period of active work, to 
maintain themselves. Differently expressed, each pro- 
ducer must create a surplus over the amount which he 
consumes. 

The economic life is much more than consumption. It 
is consumption plus production. While human wants 
are satisfied directly through consumption, it is through 
production that consumption is made possible. There 
is in this concept of the economic life no place for idlers. 
Every normal adult man or woman must be a producer 
as well as a consumer, because the individual who accepts 
a return where no service has been rendered fails in his 
duty to society. Each member of an economic society 
must, therefore, render the community such service as he 
can render, receiving in return from birth to death at 
least enough consumption goods to maintain life and effi- 
ciency. In this way the ideal of the economic fife will be 
approached. 

Nature of Consumption. — The consumption of wealth 
is a far better measure of welfare than the production of 
wealth, because the amount of consumption can Meanine « 
be more effectively determined in the individual consump- 
case. The student, therefore, must clearly 
grasp the meaning of consumption. In economics, the 
consumption of wealth means the using of economic goods 
to satisfy human wants. This using up process may 
extend over a short or over a long period of time. Food 
is consumed at once ; clothing is worn out gradually ; 
while houses are used up over long periods of time. In 
other words, some goods satisfy wants immediately and 
directly, while other goods serve their purposes gradually 
and indirectly. 



42 American Economic Life 

Consumption not only varies according to its duration, 
but it also varies according to the character of the wants 
Kinds of ^at ^ satisfies. That is, consumption may 
consump- satisfy desirable wants, or it may satisfy un- 
desirable wants. Hence, consumption is spoken 
of as being productive or unproductive. The distinction 
between the two is not hard to grasp, for it rests upon the 
simple distinction between that which is beneficial and that 
which is harmful to production. From the standpoint 
of welfare, this difference is easily discernible. 

Productive consumption is that consumption of goods 
which is beneficial to the individual and to society. When 
Productive suc ^ consum Ption takes place, the consumer be- 
consump- comes a better producer either immediately or 
eventually. If the wants that are satisfied are 
those which contribute toward greater productive power 
in the individual, the consumption is productive. Such 
consumption makes the consumer a more efficient pro- 
ducer. For example, a good diet, proper clothing, ade- 
quate housing, necessary recreation and amusement are 
all forms of productive consumption. 

Unproductive consumption produces the opposite effect 
on the individual. It either does not add to the produc- 
u firoduc- ^ ve ca P ac ity of the consumer, or it actually de- 
tive con- creases his productive efficiency. It therefore 
sum ion. (j ecreases production negatively or positively. 
The wants that are satisfied by such consumption are un- 
necessary or harmful to the consumer's power of increased 
production. Their satisfaction results in extravagance 
or in actual harm. For example, the wearing of jewelry 
and ostentatious clothing is mere extravagance, which 
does not add at all to the power of production. On the 



The Consumption of Wealth 43 

other hand, over-eating and excessive smoking are forms 
of unproductive consumption which actually decrease 
the consumer's efficiency and productive capacity. 

This contrast between productive and unproductive 
consumption shows clearly the relation between consump- 
tion and welfare. The economic life cannot be _,- , 

Effect on 

attained by those whose consumption follows un- economic 

life 

productive channels. Only through productive 
consumption can individual welfare be attained. In this 
connection it is well to remember that the whole pro- 
hibition movement aims at the removal of one great source 
of unproductive consumption. The consumption of alco- 
holic liquors was the greatest single deterrent to productive 
efficiency in American life. 

Importance of Consumption. — Wants are thus satisfied 
through the consumption of economic goods. The im- 
portance of consumption, therefore, will depend How it 
upon the number, character, and variety of varies - 
wants. In primitive times, when wants were few and 
simple, the consumption of the uncivilized man was limited 
to his elementary wants for food, shelter, and clothing. 
With the progress of civilization, wants are constantly 
increasing; and the problems of consumption, therefore, 
become correspondingly complex. The increase in number 
and variety of wants, which has accompanied advancing 
civilization, results in greater and more varied consumption, 
provided a system has been established which simulta- 
neously increases production. The rules of consumption 
should therefore play an important part in American 
economic life. 

Society is slowly learning that to receive the highest 
benefit from the consumption of wealth, the individual 



44 American Economic Life 

must consume regularly. Primitive man, depending on 
hunting and fishing for his livelihood, starved one day and 
gorged the next. Modern man, depending on a 
Consump- well-organized system of industry, is fed and 
Hon should clothed from day to day, and does not spend one 

be regular. . . ■ , , .1 . T 

day in misery and the next in happiness. In 
this way, by maintaining a constant rather than an inter- 
mittent supply of consumption goods, men are made more 
efficient producers. 

The first step in progress was to make certain a steady 
supply of consumption goods : the next step was to render 

that supply more varied. This idea of variety in 

Consump- ^^ J J 

tion should consumption may be best seen by calling to mind 
e vane . a g am one point of difference between China and 
America. The Chinese have practically no variety in their 
consumption of food. Rice is their staple ; and their 
dependence upon this single article of food has two distinct 
disadvantages. In the first place, workers get no particular 
pleasure out of this monotonous diet; and, in the second 
place, the nation starves if the rice crop fails. 

America, on the other hand, is not dependent on one 
staple. The exclusive diet of rice, or wheat, has been re- 
placed by a varied diet of fresh meat, eggs, butter, sugar, 
canned vegetables and fruits, bread and bread products, 
and fresh, salt, and canned fish. This variety in con- 
sumption has a double advantage. It means, first of all, 
that if one crop or one source of food-supply fails, the 
nation will not starve. It means, further, that this varied 
diet contains food elements which will give the individual 
more pleasure in his consumption and will therefore in- 
crease his welfare. Thus the American workman, whose 
food consumption includes meat, vegetables, fish, sugar, 



The Consumption of Wealth 45 

bread, butter, and the like, lives a more enjoyable life 
and is a far more efficient producer than the Chinese 
laborer whose diet consists solely of rice. 

With stability and variety in consumption comes the 
basis for economic welfare, provided this stability and 
variety exist throughout the various classes in 

. . Conclusion. 

the community. Hence, in order to determine 
the extent of welfare in the United States, it becomes im- 
portant to inquire what standards of consumption are 
maintained generally throughout American society. 

QUESTIONS FOR RECITATION 

1. What is the economic life? Would you be an idler, if you 
could ? 

2. What two measures of welfare are there ? Explain each. 

3. Show the relative importance in early and later life : 

a. Of consumption. 

b. Of production. 

4. Explain how the economic life is two-sided. 

5. Define consumption. 

6. Show clearly the difference between productive and unpro- 
ductive consumption. 

7. Give five examples of each. 

8. Are our wants wholly under the control of our reason? Do 
we always desire those things which are beneficial? Can you give 
illustrations from your own life ? 

9. Explain the effect of prohibition on the economic life. 

10. Explain what you mean by regularity in consumption. Give 
examples from primitive and modern man. Of what advantage is it ? 

n. What are the chief advantages secured by varying your con- 
sumption? Give examples. 

PROBLEMS FOR DISCUSSION 

1. Discuss the chief obstacles which hinder the American people 
from living the economic life. 

2. Judged by a standard they would admit to be morally sound, 



46 American Economic Life 

do people actually expend their incomes so as to receive maximum 
benefits? Give illustrations. 

3. How varied is your own diet? Test by keeping a schedule 
for a day. 

4. What advantages have nations whose consumption is varied 
over nations whose consumption is unvaried? Give examples from 
the world of to-day. 

5. Discuss the effects of varied consumption on production. 

6. Show the benefits that have resulted from the consumption of 
the following goods : 

a. Tropical fruits and vegetables. 

b. Breakfast foods. 

c. Sugar. 

7. Suppose you had a hundred dollars to spend, would you spend 
all of it at once ? What would you buy ? Would you buy the same 
things at all times and under all circumstances ? 

8. Are you able to satisfy all your wants? Which wants are 
most intense ? Why ? 

9. Contrast the life of the country dweller with that of the city 
dweller. 

10. Does "the economic life" mean a parsimonious or a narrow 
life? Why not? 

SUPPLEMENTARY READING 

Carver, T. N. Principles of Economics, Chaps. XXXVIII-XL. 
Ely, R. T. Outlines of Economics, Chap. IX. 
Fetter, F. A. Principles of Economics, Chaps. IV and XL. 
Patten, S. N. Dynamic Economics. 
Patten, S. N. The Consumption of Wealth. 
Seager, H. R. Introduction to Economics, Chap. IV. 
Urwick, E. J. Luxury and Waste of Life, Chap. III. 
Watkins, G. P. Welfare as an Economic Quantity, Chaps. I-IV. 



CHAPTER VI 

The Problem of the Standard of Living 

I. The standard of living 
i . What it means 
2. What it depends upon : 

a. The wants of individuals : 
(i) Meaning and kinds 

(2) Meaning of utilities 

(3) Law of diminishing utility 

b. The cost of living 

c. The income of workers 

II. Elements in a standard of living 

1 . What the elements are : 
a. The chief items 

h. The minor expenditures 

2. How the cost varies : 

a. In city and country : 

(1) Rent 

(2) Food 

(3) Clothing 

(4) Fuel 

(5) Incidentals 

b. In different cities 

c. The conclusion 

The Standard of Living. — The actual test of individual 
welfare is found in the standard of living enjoyed by all the 
members of the community. The standard of what it 
living simply means the amount of economic means - 
goods which an individual consumes. If he consumes 

47 



48 American Economic Life 

merely an amount sufficient to satisfy the bare necessities of 
life in regard to food, shelter, and clothing, an individual is 
said to have a low standard of living. If, in addition to 
these necessaries of life, man is able to enjoy its comforts 
and luxuries through the consumption of various other eco- 
nomic goods, he is said to have a high standard of living. 
The standard of living varies, therefore, with the amount 
of economic goods consumed. 

The consumption of these goods, which measures the 
standard of living enjoyed, depends upon three factors. 
What it * n tne nrst Pl ace > an individual would not con- 
depends sume goods unless there existed in him the desire 
for these goods. A man of very limited wants 
could never attain a high standard of living. In the 
second place, assuming that the goods are already pro- 
duced, he could not consume them unless his income or 
wage was sufficient to satisfy these wants. Finally, the 
actual amount of goods he can purchase on a given income 
will depend upon the prices of the commodities he desires, 
that is, upon the cost of living. Hence, wants, income, and 
prices must all be considered in determining an individual's 
standard of living. 

Wants vary with the individual ; so that the supply of 
economic goods which would suffice in the case of one 
The wants individual, or family, would not suffice in the case 
ofindi- of another. If a man is fond of good pictures, 
his wants are extremely expensive; if he likes 
books, they are only less so ; but, if he is satisfied with 
magazines and newspapers, they are cheaply supplied. 
Likewise, food varies from individual to individual and 
from family to family ; as does also the desire for clothing 
and housing. A standard of living, therefore, depends sub- 



The Problem of the Standard of Living 49 

jectively upon the number and character of wants, which 
become more and more complex as civilization advances. 

Wants necessarily play a large part in shaping American 
economic life. A want is a desire for a " good " ; a good 
is an object or commodity which can be used in consump- 
tion. A want may be either elementary or acquired. 
Elementary wants are natural ; and man, in a greater or 
less degree, shares these wants in common with animals. 
Acquired wants are part of our social heritage ; that is, 
they have come down to us as a result of the process of 
civilization. Among them are included the wants for 
bathtubs, furniture, paved streets, and automobiles. The 
natural wants are desires for the necessaries of life ; the 
acquired wants are desires for its comforts and luxuries. 

All economic wants, whether elementary or acquired, 
are satisfied by goods. Each good has the capacity to 
satisfy a particular want. Food satisfies hunger ; drink 
quenches thirst ; coal provides warmth ; shelter furnishes 
protection. These qualities in economic goods which 
satisfy human wants are called utilities. Utility must not 
be confounded with usefulness ; for it is perfectly possible 
for a commodity to possess utility without being useful. 
A diamond pin may not be useful, but it may satisfy one's 
desire for show. In economics, the word utility signifies 
the presence of some want-satisfying quality. 

After utilities have been created or augmented in a good, 
this good does not possess the same want-satisfying quality 
under all conditions. As the want becomes gradually 
satisfied, its intensity diminishes and the utility of the good 
consumed decreases. This variation in utility gives rise 
to the formulation of the law of diminishing utility, which 
states that additional units of a good mean a decreasing 



50 American Economic Life 

utility in each unit consumed. Suppose, for example, 
that you have been taking a long tramp and are strolling 
along a hot country road. You are tired and thirsty, and 
long for some luscious fruit to refresh you. The thought 
of an apple comes into your mind and you feel an intense 
want. If you could get just one apple, it would possess 
very great utility for you. As you trudge along you find, 
quite unexpectedly, that your longing is about to be satis- 
fied. A farmer hails you, and, being loaded down with 
apples, offers you one. You thank him and eat the apple 
with extreme satisfaction. He offers you another, and 
still another, and by this time your want has been almost 
satisfied. You have enjoyed each apple, but in a less and 
less degree, because every additional apple affords less sat- 
isfaction than the preceding one. Finally, after you have 
eaten five or six apples, you have no desire for any more, — 
so far as you are concerned they cease to possess utility. 
In fact, if you were to persist in consuming apples, pain 
and distress would ultimately result ; that is, to you, apples 
which a few moments before possessed utility would now 
possess actual disutility. This fact of diminishing utility 
is important because it affects the determination of the 
price you are willing to pay for the commodity you desire. 
The price of commodities, or the cost of living, is another 
important factor upon which a standard of living depends. 
The cost When prices are high, a given income will evi- 
of living. dently purchase less than when prices are low. 
In fact, when prices are very high a man receiving com- 
paratively good wages may not be able to purchase as 
many goods as a man with a smaller wage can buy at a 
time when prices are low. For example, the man with a 
$2000 income, who pays eighty cents a pound for butter, 



The Problem of the Standard of Living 51 

is not so well off as the man with a $1500 income who buys 
the same butter for forty cents a pound. The purchasing 
power of income is therefore a very important factor in 
determining the standard of living. 

Finally, income itself is of vital importance in deter- 
mining the amount of economic goods that an individual 
may consume. When wages are extremely low The income 
and prices are normal, it is impossible to maintain °f workers -. 
a high standard of living. So obvious is this, that low wages 
in this country are almost synonymous with low standards. 
Labor organizations, therefore, fight with all the might 
of their great power to keep wages at a high level, in order 
that the workers may be able to maintain a standard of 
living high enough to include not only the necessaries of 
life, but also the goods that are needed to satisfy the 
higher wants that men have developed. 

Elements in a Standard of Living. — A standard of 
living to accomplish its purpose of securing individual 
welfare and maintaining efficiency should provide What the 
for : (1) the necessaries of life, including housing, elements 
food, clothing, fuel, light, and transportation ; 
(2) recreation facilities, including proper provision for 
health and hygiene, amusements, and books ; (3) voluntary 
subscriptions for insurance, clubs, trade unions, and 
regular savings ; and (4) unusual expenditures for medi- 
cines and physicians, as well as funds required for house- 
hold furniture and incidentals. 

Almost all the expenditures of a workingman's family 
are made for the necessaries of life, of which housing and 
food are by far the most important in a modern The chief 
city. The investigations that have been made ttems - 
into this subject have been based upon the normal family 



52 American Economic Life 

of five persons, including the father, mother, and three 
children under fourteen years of age. The families and 
wages considered are those of workingmen. It has been 
found that such a family spends from eighteen to twenty- 
five per cent of its income for rent, the percentage varying 
according to the income received. It has also been shown 
that the largest single factor in the family budget is food, 
the expenditure for which amounts to from forty to forty- 
five per cent of the income of workingmen's families. 

Clothing was found to constitute a relatively small item 
in the budget of a city workingman's family, the amount 
The minor s P en ^ f° r sucn purpose averaging only about 
expendi- thirteen per cent of the income. The expendi- 
tures for fuel and light are comparatively small, 
varying from four to six per cent of the family income; 
while the amount spent for transportation in large cities 
averages about two and one-half per cent of the income. 
Expenditures for recreation vary considerably. In ' the 
lower income groups they are very small, but they rise 
rapidly with the increase of income. The same thing is 
true of the voluntary disbursements and the unusual 
expenditures. 

In this discussion of the elements in a standard of living 

and of their relative importance in the family budget, it 

is important to remember that only city condi- 

cost varies: tions and workingmen's families have been here 

in city and investigated. To estimate the relative expendi- 

country. 

tures for these different items for a family living 
in the country, it is necessary to take into consideration 
the difference between city and country conditions and 
the consequent difference in the cost of living in city and 
country. A particular element in the standard of living, 



The Problem of the Standard of Living 53 

such as clothing, may not possess the same importance to 
the country family as to the city dweller. Furthermore, 
the cost of living as a whole may be considerably lower in 
the country than in the city ; so that, on a given income, a 
higher plane of living may be attained by living in the 
country rather than in the city. 

Take, for example, the question of rent. For a given 
sum, which in the tenement district of a great city would 
suffice only for one or two rooms, a family may secure in 
the country a fairly comfortable four- or five-room wooden 
house. Thus, in regard to housing, a higher plane of 
living, en a sum allotted to rent, may be maintained in 
the country than in the city. 

Again, the price of food, the most important item in 
maintaining a proper standard of living, varies in city 
and country. Although the price of meat is about the 
same in both places, vegetables are usually lower in the 
country, the price paid for them being the equivalent of 
the city price with the cost of freight, the charge of the 
commission merchant, and the profits of the retailer de- 
ducted. However, the prices of canned goods, bread, cakes, 
and crackers differ little in city and country districts. 
Things which are produced in the country are much lower 
in price there than in the city; while things which are 
produced in factories are about the same price in city and 
country. 

In the country the item of clothing is not so important 
as in the city. Perhaps the cost of clothing would not 
vary so greatly in city and country districts were it not for 
the presence in the city of rich people who dress extrav- 
agantly. The standard of dress which they set becomes 
the conventional or fashionable standard, and it must be 



54 American Economic Life 

followed by all who would be " in style." The result is 
an expenditure in the city for trumpery and cheap finery 
which is unknown in the country. 

Another important item in the city is the expenditure for 
fuel ; but in the country fuel is almost a negligible quantity 
because wood, which is very generally burned, can be 
easily and inexpensively secured. Hence, the fuel supply 
is much more cheaply provided in country districts and 
small towns than in larger cities where coal is so expensive. 

Finally, the country districts do not furnish so many 
opportunities for spending money as do the city districts. 
There is little carfare to pay, and the temptation to buy in 
stores is greatly lessened by the absence of display adver- 
tising in shop windows. Therefore, less will be spent in 
the country for incidentals. 

Again, the cost of living varies in cities themselves, and 
individual items of expense are much greater in some 
in different cities than in others. For example, a great 
cities. metropolitan city, like New York, may require 

a much higher expenditure for housing than is made 
necessary by living in a smaller city. While one item may 
offset another, these differences must be taken into account 
when estimating the cost of living in different cities, and 
the standards of living attainable in them on a given 
income. Furthermore, it is well to remember that many 
of the investigations concerning standards of living have 
been conducted in great metropolitan cities, and that, 
therefore, it may be necessary to revise our conclusions 
when the results of such investigations are applied to 
smaller cities. 

From this discussion of the standard of living it will be 
seen just how difficult it is to come to definite conclusions 



The Problem of the Standard of Living 55 

regarding it. In forming our judgments we must take 
into account (1) the wants of individuals, which them- 
selves must be differentiated ; (2) the cost of liv- The 
ing, which itself is found to vary in different concl usion. 
localities, and (3) the income of workers, which is required 
to purchase the goods needed for consumption. In order 
to arrive, therefore, at a more definite conclusion regarding 
the actual standards of living enjoyed by American workers, 
it is now our purpose to inquire into the wage received, 
and the wage required, to maintain such a standard of living 
as will insure individual welfare and guarantee industrial 
efficiency. 

QUESTIONS FOR RECITATION 

1. Define "standard of living." 

2. What are the effects of maintaining a reasonably high standard 
of living ? 

3. What are the three determinants of a standard of living? 

4. Explain the meaning and kinds of wants. 

5. Show' the relation between wants and utilities. 

6. Explain the law of diminishing utility. 

7. Enumerate the four elements in a standard of living. 

8. Show the relative proportions of income spent for food, shelter, 
and clothing among workingmen's families in industrial centers. 

9. What are the minor expenditures? How are they relatively 
distributed ? 

10. Compare the cost of living in city and country in regard to : 

a. Rent. 

b. Food. 

c. Clothing. 

d. Fuel. 

e. Incidentals. 

n. Why does the cost of living vary in cities? 



56 American Economic Life 

PROBLEMS FOR DISCUSSION 

1. Discuss the effects of differences in cost of living upon stand- 
ards of living. 

2. In your opinion, what are the most fundamental reasons for 
maintaining a proper standard of living in a community ? 

3. Do economic wants increase more quickly than the stand- 
ard of living ? Give examples. 

4. What would be the effect upon standards of the poorest third 
of our city populations moving on to farms ? Discuss and illustrate. 

5. Is it possible in the United States to provide a uniform mini- 
mum standard of living for all ? State your reasons. 

6. Discuss the ultimate effect on the individual of living below 
the normal standard. 

7. Why should the community at large be interested in main- 
taining a reasonably high standard of living ? 

8. What are the forces most to be relied upon to maintain a 
proper standard of living ? 

9. Analyze the standards of living maintained in your own 
community. If they vary, explain the reasons. 

10. Of the three factors determining the standard of living, 
which do you regard as the most important? Why? 

11. What is meant by a normal, reasonable, or proper standard 
of living ? 

SUPPLEMENTARY READING 

Carver, T. N. Principles of Political Economy, Chap. XLII. 
Chapin, R. C. The Standard of Living among Workingmen's Families 

in New York. 
Devine, E. T. Economics, Chap. V. 
More, L. B. Wage Earners' Budgets. 
Patten, S. N. The Consumption of Wealth. 
Streighthoff, F. H. The Standard of Living among the Industrial 

People of America. 



CHAPTER VII 
The Problem op Income 

I. Wages of workingmen : 
i. The problem stated 

2. Pre-war times: 

a. The wage paid 

b. The wage required 

3. Post-war times : 

a. The wage paid 

b. The wage required : 

(1) The reason 

(2) The amounts 

c. The conclusion 

II. Wages and prices 

1 . The relationship 

2. Money wages and real wages 

3. How prices affect wages 

4. Recent fluctuations 

5. When prices rise : 

a. The sufferers 

b. The causes : 

(1) Increased supply of money 

(2) Decreased production 

(3) Relation of supply and demand 

(4) Defects in government 

6. When prices fall 

7. The conclusion 

Wages of Workingmen. — In order to maintain the 
standard of living necessary for health and efficiency, the 

57 



58 American Economic Life 

worker must receive wages sufficiently high to purchase 
the goods required for consumption. The problem now 
The problem before us is to find out what actual wages are 
stated. paid workingmen ; whether they are sufficient 

to meet the requirements of a proper standard of living ; 
and, if not, to inquire what wages should really be paid 
them. To answer these questions it will be necessary to 
indicate the general level of wages throughout the com- 
munity, to show the effect of prices on wages, and to 
realize at the outset that the statistics dealing with incomes 
are constantly changing, and that, therefore, no con- 
clusions as to relative poverty and prosperity can be valid 
for long periods of time. 

A number of important investigations have been made 
by individuals and Government Bureaus into the wages 
„ of laborers and the incomes of American families. 

Pre-war 

times: The The United States Bureau of Labor issues f re- 
wage m . q Uent Bulletins embodying the results of its 
investigations into this field. Reports issued at the close 
of the first decade of the twentieth century revealed some 
interesting conditions that existed at that time among 
workers in industrial sections in the northeastern part 
of the United States. This survey reflected normal 
conditions that prevailed before the world was plunged 
into the war that dislocated its entire economic system. 
The results of these investigations, therefore, may be taken 
as representative of typical conditions existing in certain 
industrial sections of America before the World War. 
The statistics compiled showed that, at that time, half of 
the adult males working in these sections of the United 
States received less than $600 per year ; that three- 
quarters received less than $750 annually ; and that nine- 



The Problem of Income 59 

tenths earned less than $1000 per year. These figures were 
approximate estimates and were not strictly accurate 
because they did not make allowance for unemployment. 

At the same time that these statistics were being com- 
piled, other investigations were being made into the actual 
income required to maintain a reasonable stand- The wage 
ard of living among industrial workers. A re ^ mred - 
study of the families of workingmen living in Buffalo, 
New York, and Pittsburgh showed that a normal family of 
five could maintain a proper standard of living only on an 
annual income ranging from $750 to $1000, according to 
the locality. This amount was required to provide the 
necessaries of life for the parents, and to furnish the children 
with nourishing food, warm clothing, decent housing, 
elementary education, and a legitimate amount of rec- 
reation. It was therefore evident that a great discrep- 
ancy existed between the wage paid and the wage required 
to maintain efficiency. For, at that time, according to 
these statistics, three-fourths of the industrial workers in 
certain sections were receiving less than the minimum, 
and nine-tenths less than the maximum income required 
to maintain a proper standard of living. 

With the World War, and thereafter, came great changes 
both in the wage paid workers and in the income required 
to maintain a normal standard of living. It is Post . war 
safe to say that, as a result of the changes times: The 
wrought by this world cataclysm, the wages of wage 
many workers doubled and even trebled during this 
period ; so that those formerly receiving annual wages of 
$750 or $1000 then received $1500 or $2500. Particularly 
was this true of the skilled and semi-skilled laborers, al- 
though many unskilled workers profited by the general 



60 American Economic Life 

increase. In the skilled trades it sometimes happened 
that wages were not only doubled, but even trebled. The 
income of men receiving fixed salaries, however, did not 
rise correspondingly. The rise in wages during the war was 
attested by the income tax returns of 191 7, which showed 
that, in approximately seventeen per cent of the 20,000,000 
American families, some one individual reported an income 
of more than $1000. If we take into account (1) the fact 
that these returns did not include family incomes totaling 
$1000 made up of individual incomes of less than that 
amount, and (2) the fact that they did not include the 
rental value of the home owned, and (3) the fact that they 
did not include the incomes of those exempt from the pay- 
ment of the tax, as well as those who actually evaded 
making income tax returns, it is not at all improbable 
that, instead of seventeen per cent, twenty-five ,pr thirty 
per cent of American families at that time received incomes 
in excess of $1000. Thus, as contrasted with the pre-war 
conditions, perhaps seven-tenths, not nine- tenths, of 
families in the United States earned less than $1000 
annually. 

This general increase in wages following the World War 
was necessitated by the higher income required to maintain 
The wage the standard of living essential to individual 
required. an( j soc i a l welfare. The standard of living itself 
had not necessarily advanced, but the income required to 
maintain the old standard had greatly risen. This fact 
was clearly shown by various investigations of the cost 
of living in different cities of the United States. For 
example, in Philadelphia, the Bureau of Municipal Re- 
search issued an exhaustive report in 1919 showing that 
the normal workingman's family, consisting of two adults 



The Problem of Income 61 

and three growing children, required a minimum annual 
income of approximately $1800 in order to maintain the 
standard of living enjoyed before the World War on an 
income of $1000. This position was supported by the 
official index numbers of the Federal Bureau of Labor 
statistics, which gave the increase in the cost of living in 
the shipbuilding centers of the United States during the 
five years of the World War as eighty per cent. In other 
words, a man receiving an annual income of $1000 in 19 14 
required an income of $1800 in 19 19 to maintain his pre- 
war standard. Statistics issued by the Federal Bureau of 
Labor in 1920 showed that the average increase in the 
cost of living had jumped from ninety-six per cent at the 
beginning of that year to one hundred and nineteen per 
cent toward the close of that year. 

The Philadelphia report was based upon a detailed study 
of the home budgets of two hundred and sixty typical 
families living, for the most part, in the industrial districts 
of the city. The annual expenditures of the average family 
were allotted as follows: for food, $674; for rent, $300; 
for clothing, $346 ; for fuel and light, $84 ; for trans- 
portation, $35 ; for miscellaneous expenditures, including 
those for cleaning supplies, health, furniture, dues, rec- 
reation, and amusement, $361. The report did not regard 
these expenditures as fixed or as ideal, but considered them 
as fairly representative of the amount needed for working- 
men to realize a reasonable standard of living in times of 
high prices and general transition. For other cities, these 
individual items and the sum total of income varied accord- 
ing to local conditions. In some cases the minimum set was 
considerably lower than $1800; while in New York, in the 
garment industry, the workers placed the minimum in- 



62 American Economic Life 

come required for a reasonable standard of living as high 
as $2500. 

This contrast between conditions prevailing in 1910 and 
in 1920, with regard to the wages paid and the income 
The required to maintain individual and social wel- 

condusion. f are? ma k es jt evident that no fixed figures can 
be given either for the wage paid, or the wage required, for 
the normal workingman's family. To predict what wages 
and standards will be in future decades, is the task of the 
prophet, not the economist. But, in attempting to fore- 
cast the future, it is well to bear in mind the prolonged 
abnormal situation following the Civil War, when it re- 
quired more than a decade to restore the old equilibrium 
between wages and prices. However, the half century 
elapsing between these two great wars wrought vital 
national changes which make comparisons difficult. The 
Federal Reserve Act, for example, passed before the out- 
break of the World War, diminished the possibility of 
panics in times of crises by means of its system of regional 
banks, which displaces the old centralized control of 
finances. War's aftermath, however, is usually the same ; 
underproduction, overconsumption, speculation, inflation, 
debt, and depression. In the end, the bubble of exorbitant 
prices bursts and production once more becomes normal. 
When the supply of goods is adjusted to the demand, 
prices decline and wages fall. If this transitional period 
is a gradual one, the necessary adjustments may be made 
without panics and industrial crises. If men do not work 
and save, however, no critical economic period can be 
successfully passed. 

Wages and Prices. — This discussion of wages brings 
out the intimate relation that exists between wages and 



The Problem of Income 63 

prices. A study of wages of itself would tell little of the 
condition of the worker. A study of prices alone would 
be equally ineffective. The two together con- xhereia- 
stitute complementary sides of the same ques- tionshi P- 
tion. Wages are not an end in themselves; they are 
merely a means to the consumption of goods. The really 
important point is not how many dollars a man receives, 
but how many goods he can buy with these dollars ; and 
this in turn is determined by the prices of the goods. 

In this manner, the purchasing power of wages is the 
real determinant of a standard of living. Hence it is 
highly important to bear in mind the distinction Mone 
between money wages and real wages. Money wages and 
wages are wages actually paid in dollars and 
cents ; while real wages represent the purchasing power 
of that money. The problem of income, therefore, centers 
about real wages, for it is that which determines the 
worker's standard of living. Not money wages, but the 
goods which the money will buy, is the factor of vital 
importance in our study of workingmen's incomes. 

In that study the effect of prices on wages has already 
been indicated. This effect was made evident to all by the 
course of the World War. But before that „ 

How prices 

event, it had been frequently overlooked ; affect 
especially by the immigrant to this country, 
who was attracted by the lure of what appeared to be high 
wages. As compared with what the immigrant received 
in his native country, the wage he received here was two 
or three times as great. This difference in wages strongly 
appealed to him ; but when once here he found that prices 
had advanced in an equal, if not a greater, proportion. 
Thus it was quite possible for his real wages to be less in 



64 American Economic Life 

his new home than in his old. To offset this, he fre- 
quently maintained an exceedingly low standard of living. 
On the other hand, when, after the World War, prices 
advanced and production declined abroad in a greater 
ratio than wages advanced, the immigrant again cast 
longing eyes to America where the rise in prices and wages 
had been more proportional. 

Fluctuations usually occur in both wages and prices. 
The United States Labor Bureau frequently publishes 
Recent bulletins contrasting the wages of labor with the 

fluctua- cost of living. A study of these bulletins shows 
that since 1890 there has been a very great 
change in both wages and prices. Both fell heavily dur- 
ing the financial depression of 1893-94, and then both 
rose regularly until 1907, when there was another sharp 
decline. This was followed by a slight rise in both until 
1 914, when there began the tremendous rise which con- 
tinued throughout the World War, when a downward re- 
action again set in. 

The question of whether, in these fluctuations, prices 
have risen more than wages, or wages more than prices, 
Wh . is a vital one. It may not be possible to deter- 
rise: The mine this point with mathematical accuracy 
for all occupations and for all classes of people. 
But one fact seems apparent, — prices rise for all who 
consume the goods in question, but wages rise propor- 
tionately for only a part of the workers who consume these 
goods. Hence there is little doubt that, in these fluctua- 
tions, the real wages of many individuals do not advance, 
but that in many cases they actually decline. This situa- 
tion becomes particularly acute among those who receive 
crystallized wages, or salaries, ranging from less than $1000 



The Problem of Income 65 

to $3000 annually. The studies of wages and the cost of 
living include the wages of wage-earners only. Were 
like investigations made for the large class of salaried em- 
ployees, it would probably be found that while, in times 
of great economic changes, prices rise as much as one 
hundred per cent, salaries may rise only thirty or forty 
per cent. 

What are the causes of rises in prices ? Many attempts 
have been made to answer this question, and it is possible 
here only to indicate briefly the main factors to n t 

J ... Causes of 

be considered in a discussion of this question, rise in 
The World War, more than anything else, 
stimulated inquiry in this direction and brought to general 
attention the paramount significance of certain funda- 
mental economic principles at work in American life. 
These may be summarized under the effects of (1) the 
increased supply of money, (2) the decreased amount of 
production, (3) the relation of supply and demand, and 
(4) the defects in government which permit individual gain 
at the expense of social welfare. In addition to these, 
there are many other contributing causes, the investigation 
of which is far beyond the scope of this inquiry. 

Prices may be considered from two points of view: (1) 
from the value of money on the one side, and (2) from the 
value of goods on the other. Prices, therefore, may rise 
because gold, which represents money, has decreased in 
value ; or because goods, other than gold, have increased 
in value. When money is more plentiful, a unit of it is 
worth less and, therefore, a greater number of units is 
required to make up a given value. During the period of 
the World War the amount of money in the United States 
was enormously increased. This increase was brought 



66 American Economic Life 

about in two ways: (i) through the inflow of gold from 
abroad to pay for the huge quantities of food, munitions, 
and supplies exported to Europe; and (2) through the 
issue of bonds and Federal Reserve notes which had the 
effect of currency inflation. Through inflation, therefore, 
the value of money was decreased, and prices accordingly 
rose ; that is, it required more dollars to purchase a given 
quantity of goods. 

Prices may also rise because goods have increased in 
value. Just as there may be an over-supply of gold, so 
there may be a shortage of goods ; and, when both these 
circumstances occur at .once, the effect is twofold. During 
the World War, vast quantities of goods were sent abroad, 
while few goods were being shipped to this country. This 
decreased the amount of goods left for home consumption. 
At the same time, two million workers were withdrawn from 
production for military purposes ; so that there resulted 
not only a decreased production, but an increased cost of 
production due to the scarcity of labor. Thus it happened 
that the value of goods rose enormously. The war, 
draining us of goods and flooding us with money, caused 
goods to rise in terms of money. Only with increased 
production, or with scarcity of money, is an equilibrium 
restored. 

Again, we may look at the problem from the standpoint 
of the relation between supply and demand. An increase 
in demand tends to raise price, while an increase in supply 
tends to lower price. Since the price of a good is deter- 
mined by the demand for, and the supply of, that good, it is 
an easy matter to see the effect of this relationship upon 
prices during and right after the World War. Goods were 
in great demand, while their supply was limited; hence 



The Problem of Income 67 

prices were high. On the other hand, gold was not in 
such great demand, and its supply was relatively plentiful. 
Hence the price of gold, its value in terms of goods, was 
low. 

Aside from these economic laws, other considerations 
may enter into the determination of prices. Under the 
conditions noted above, prices of goods are bound to rise 
or fall ; but, because of inadequate governmental regu- 
lation, or because of individual shortcomings, it is quite 
possible in modern society for prices to rise beyond the 
limit required by economic laws. The mere statement of 
this fact will bring to mind the evils from which society 
suffers. So long as natural resources are monopolized by 
individuals for private gain, so long as men are allowed 
unrestrained to fix prices for their own enrichment, 
and so long as extravagance — not thrift — determines 
man's consumption, society cannot hope to attain that 
individual welfare in which normal prices play an im- 
portant part. 

Prices fall with the reversal of the conditions previously 
described. To bring about the fall of prices it is first 
necessary to increase production. Goods must when 
become more plentiful so that their value may prices fal1 - 
decline. While this process is taking place, deflation must 
also occur. That is, the value of money must become 
greater by limiting its supply. This may be accomplished 
by retiring paper currency, and by increasing import trade. 
When imports exceed exports, the amount of money in a 
country decreases through the shipment of gold abroad to 
pay for the unfavorable balance of trade. In this manner 
the quantity of money decreases, its value rises, and prices 
decline. Of course, this increased production of goods and 



68 American Economic Life 

decreased supply of money must be accompanied by a 
decline in extravagant living and by a return to normal 
habits of work. 

With this chapter we close the discussion of the problems 

connected with the consumption of wealth. Whatever 

may be the ultimate conclusion regarding the 

Conclusion. . . 

amount of wages required to meet the varying 
cost of living, the fact still remains that it is society's 
duty to see that a sufficient income be provided the worker 
to maintain a reasonable standard of living. Families — 
men, women, and children — require a certain minimum 
of the necessities of life. Such a minimum, whatever it 
may cost, should, in the interest of welfare and efficiency, 
be assured every member of the community. In the 
United States, our study of wages shows that individual 
prosperity, through the distribution of social income, is 
much nearer realization than in the older European civili- 
zations. 

QUESTIONS FOR RECITATION 

i. Compare the wages of workingmen now with the wages paid 
them before the World War. 

2. Compare present-day wages with the wage received after the 
World War. 

3. Compare workingmen's wages just before and just after the 
World War. 

4. What accounts for these fluctuations in wages? 

5. Is the wage paid usually equal to the amount required to 
maintain a normal standard of living ? Prove your position. 

6. What constitutes a "normal family"? What amounts are 
required to-day to maintain them in health and efficiency? Do 
they receive the sum total required? 

7. Explain the difference between money wages and real wages. 

8. How do prices affect wages? 



The Problem of Income 69 

9. Why is the actual amount of the money wage unimportant ? 

10. Explain the causes of a rise in prices. 

1 1 . Who suffer the most when prices rise ? 

12. When do prices fall ? 

13. Who gain the most when prices fall? 

PROBLEMS FOR DISCUSSION 

1. Discuss the relative distribution of wealth throughout the 
United States. 

2. Is it true that, as America becomes wealthier, the masses 
become poorer ? Give reasons for your conclusion. 

3. Discuss the relation that should be maintained between 
wages and standards. 

4. When there is a discrepancy between wages and standards, 
what remedial steps should be taken ? 

5. Do high wages mean a high standard of living ? Why not? 

6. When do wage increases become necessary? When may 
wages be lowered without lowering the standard of living ? 

7. Show what wages should be to-day and what they actually 
are. 

8. Make up some typical family budgets. 

9. Compare the fluctuations in wages and prices that occurred 
after the Civil War with those that occurred after the World War. 

10. How may an adjustment be effected between wages and 
prices ? 

11. Discuss Engel's laws of expenditure. 

12. Do you believe in minimum wage laws? To what extent 
may they be employed? What evils may result from them? 

SUPPLEMENTARY READING 

Burton, T. E., and Seldon, G. C. A Century of Prices. 

Chapin, R. C. The Standard of Living among Workingmen's Families 

in New York. 
Commons, J. R. Distribution of Wealth, pp. 252 et seq. 
King, W. I. The Wealth and Income of the People of the United 

States. 



70 American Economic Life 

Parlin, C. C. Basic Facts of Prosperity in IQ20. 

Reports of Federal Commission on Industrial Relations, 191 5 to 
date. 

Reports of Philadelphia Bureau of Municipal Research, 1919 to date. 

Streighthoff, F. H. The Distribution of Incomes, Columbia Uni- 
versity Studies, Vol. Ill, No. 2. 

United States Bureau of Labor Bulletins. 



PART THREE 
PROBLEMS OF PRODUCTION 

CHAPTER VIII 

The Production of Wealth 

I. Nature of production 
i. Meaning of production 

2. Kinds of utilities : 

a. Natural utilities 

b. Form utilities 

c. Place utilities 

d. Time utilities 

e. Possession utilities 

3. Factors of production : 

a. What they are 

b. Their relative importance 

II. Part played by natural resources 

1 . In ancient times 

2. In modern times 

3. In India and China 

4. In the United States 

5. The conclusion 

Welfare may be measured not only in terms of con- 
sumption, but also in terms of wealth production. In 
fact, the whole process of consumption is conditioned 
upon that of production. It is, therefore, our purpose 
now to inquire into the nature of production, to analyze 

71 



72 American Economic Life 

the basic factors of production, and to study the develop- 
ment of the productive process in the United States, in 
order to ascertain how far the production of wealth has 
administered to the welfare of the American people. 

The Nature of Production. — Production is the process 
of creating or of increasing utilities in goods, that is, of 
Meaning of creating want-satisfying qualities in the raw 
production, materials of nature which supply the basis of all 
economic goods. According to the theory of the inde- 
structibility of matter, man can neither create nor destroy 
a single unit of matter. However, it is perfectly possible 
for him to change the form of this matter, or to otherwise 
alter its condition, so that it will satisfy some definite 
want. This process, taking place everywhere and at all 
times, results in the creation of utilities in economic goods. 
Man's efforts in the field of production consist, therefore, 
of all his activities which lead to the creation of utilities 
of one kind or another. 

In economics, the word utility signifies, as we have seen, 
the presence of some want-satisfying quality. There 
Kinds of will, therefore, be as many kinds of utilities as 
utilities : there are ways in which goods may satisfy human 
wants. Goods may satisfy wants either because of their 
nature, or form, or place, or time, or possession. Hence 
there are five kinds of utilities: (i) natural utilities, 
(2) form utilities, (3) place utilities, (4) time utilities, 
and (5) possession utilities. 

Natural utilities are those existing in goods because of 
their inherent nature. Coal, for example, though embedded 
Natural * n the vein, possesses utility. To be sure, this 
utilities. utility cannot be made available without an 
intermediate process called mining; but the coal, like 



The Production of Wealth 73 

many other gifts of nature, possesses in itself the power to 
satisfy human wants. 

Form utilities are those created by a change in the form 
or in the inherent qualities of goods. For example, a chair 
in the furniture factory possesses a greater want- Form 
satisfying capacity than the boards in the lumber unties. 
yard, or the trees in the forest. The clay in the clay pit 
will not satisfy nearly so many wants as the clay pressed 
into bricks, baked and ready for building operations. 
Form utilities are the creations of manufacturing processes, 
and we therefore usually think of manufactured goods 
when we speak of this kind of utility. 

Place utilities are those created by changes in the loca- 
tion of goods, whereby such goods are taken from a place 
where they are not especially needed to a place pi ace 
where they are in great demand. Occasionally, utilities - 
cotton in certain parts of the South and corn in certain 
parts of the West are of such low utility that they are 
sometimes burned for fuel; but the transportation of 
either commodity to Massachusetts greatly enhances its 
want-satisfying quality. The utilities in the goods have 
been increased by transportation, because cotton or corn 
will satisfy more wants in Boston than in Texas or 
Kansas. Transportation has created place utility in these 
goods. 

Time utilities are those created by holding economic 
goods from the time when they are not wanted till the 
time when they are wanted. Ice, in January, is Time 
seldom wanted and possesses little utility, but the uiilities - 
same ice stored until July is very much in demand, and 
therefore possesses great utility. This increase in utility 
due to the lapse of time is called time utility. 



74 American Economic Life 

Possession utilities are those created through changes in 
ownership. By an act of exchange, a good may pass from 
Possession the hands of one who does not greatly desire it, to 
utilities. another who feels the need of it intensely. To 
its new owner it acquires additional utility. This kind of 
utility is especially perceptible in acts of barter, whereby 
exchanges are made that directly benefit both parties. 
The added utility that comes through change in ownership 
is thus called possession utility. In modern life, real 
estate brokers, for example, are engaged in giving goods 
this kind of utility. 

In various ways, therefore, man is engaged in acts of 
production ; that is, in increasing or creating utilities in 
goods in order that human wants may be satisfied. 

Production, which furnishes the material basis of welfare, 
depends upon natural resources, labor, and capital. 
„ " , Natural resources are gifts of nature, limited in 

Factors of 6 . , . 

production: extent; labor is industrial effort; capital is an 
What they economic good used to assist in production. 
Every modern productive operation requires 
these three factors. Land furnishes the raw material; 
labor, the effort ; and capital, the tools which are to assist 
in the act of production. Thus, specifically, the tree stand- 
ing on the hillside is a natural resource. A man approaches 
the tree and begins chopping it with an ax. The man is 
labor; the ax is capital. The felling of the tree, which 
has brought it one step toward its final form of chairs, 
let us say, is one act in an operation which will enable the 
wood to satisfy human wants. Therefore, the entire opera- 
tion is an act of production. 

No modern productive act takes place without these 
three factors. To-day, the production of material wealth, 



The Production of Wealth 75 

in whatever form imaginable, has become so highly or- 
ganized that it is impossible without the participation of 
land, labor, and capital. The necessity for the 
participation of all three factors, however, did relative 

. . ,-, . , -1 , 1 importance. 

not originally exist, because nature and man — ■ 
land and labor — were the primary forces at work in civili- 
zation. Nor would this necessity exist to-day, if we 
could reproduce primitive conditions. A modern Robinson 
Crusoe, with only natural resources and his own labor to 
rely upon, would be obliged to create his own capital. 
Capital is thus the offspring of land and labor. It is the 
secondary factor in production, while land and labor are 
the primary requisites of production. However, this dis- 
tinction, to-day, is of comparatively little importance, 
because capital is just as essential to modern production 
as either land or labor. In order to realize to what extent 
a nation may attain economic greatness, it will be necessary 
to examine carefully the part played by each of these 
factors in production. First we shall examine the part 
played by natural resources. 

The Part Played by Natural Resources. — Natural re- 
sources may not make a civilization, but without them 
civilization would be impossible. A study of the i n ancient 
great civilizations of the past shows that, without times - 
exception, the basis of their greatness was an adequate 
supply of natural resources. Babylonian, Egyptian, Car- 
thaginian, and Roman civilizations were all established in 
fertile valleys, or with a nucleus of fertile land. In an age 
when agricultural land was almost the only resource avail- 
able, civilizations were necessarily founded in fertile agri- 
cultural districts. This truth was in the mind of the 
preacher who publicly gave thanks to Heaven for making 



76 American Economic Life 

great rivers flow beside the big cities. Although his eco- 
nomics was defective, he was grasping at an important 
geographical principle. 

Natural resources are more important to-day than they 
were in any historic period, because modern civilization 
in modern is founded on mineral as well as on agricultural re- 
times, sources. What, then, are the present resources 
of the world? Where do we find the physical possibilities 
for the development of great modern civilizations? The 
retarded development of the African continent is the out- 
come of its vast desert, great heat, regular coast line, and 
few navigable rivers. South America has its Amazon 
basin, but the tropical location and dense vegetable growth 
prevent that region at present from realizing its full possi- 
bilities ; while the southern portions of the continent are 
too restricted in extent to furnish the basis for an exten- 
sive civilization. In Europe, where the fertile basin of the 
Danube provides a really adequate physical background 
for this purpose, racial and political handicaps stand in 
the way of economic development. In a similar manner, 
Australia, while great in extent and situation, is retarded 
by a regular coast line and the restrictions of vast stretches 
of barren territory. 

There remain three other regions abounding in natural 
resources, and furnishing a physical basis for marvelous 
in India economic development. Two of these are in 
and China. Asia, and each is the seat of ancient power and 
empire. Both India and China enjoy physical resources 
equal to those of any world power, although the semi- 
tropical climate of the former partly militates against its 
success as the home of a dominant civilization. These 
regions, however, are, as we have seen, hide-bound by tradi- 



The Production of Wealth 77 

tions which stand in the way of utilizing the vast resources 
at the command of the native peoples. Thus, labor is 
inefficient and capital is inadequate to develop the natural 
resources which form the basis of national greatness and 
prosperity. 

The remaining and greatest of these areas for world power 
and civilization is the United States. Here abound those 
natural resources which are at the foundation of In the 
production, and upon which all civilizations rest. United 
Here also is an abundant supply of capital, 
amassed by the breaking of tradition, and an efficient labor 
force, independent and self-respecting. The United States, 
with its Mississippi Valley, its variety of climate, its agri- 
cultural and mineral resources, its great rivers, and its 
broken coast line, has spelled opportunity to millions of 
civilization-makers, and promises in the future even greater 
economic and spiritual development. 

So vital is the part played by natural resources in the 
production of wealth that industrial supremacy is de- 
pendent upon their utilization. To attain eco- The 
nomic greatness a nation must command the use c° nclusion - 
of such resources, if it does not actually possess them. 
Thus England not only relies upon the advantages of 
natural position and the rich mineral deposits of her own 
land, but draws as well upon the vast stores of natural 
wealth supplied by the British Empire. France depends 
not only upon her rich agricultural resources, but looks 
for the full restoration of her coal and iron deposits. Ger- 
many, in her insatiable desire to secure dominant control 
of land and minerals, warred upon civilized mankind. 
Thus the world witnessed the titanic struggle for economic 
supremacy based upon the control of natural resources. 



78 American Economic Life 

On the other hand, the failure to develop the resources of 
the land, when they exist freely in nature, accounts for 
industrial backwardness and national retardation. China's 
failure in this respect has already been noted. In Europe, 
the neglect of Russia to develop adequately the vast re- 
sources of the land accounts for her failure thus far to 
attain that commanding economic position which her 
natural wealth justifies. With efficient labor, with in- 
creased capital, and with a highly organized productive 
system, the twentieth century holds out untold possibili- 
ties for those civilizations possessing adequate natural 
resources. 

QUESTIONS FOR RECITATION 

i. When may production be a measure of welfare? When is 
it not? 

2. Define production. What is the test of a productive act ? 

3. Define utility. How do utilities and wants differ? 

4. Name and define the five kinds of utilities. 

5. Give an example of each kind of utility. 

6. Tell, with your reason, (1) whether each of the following 
possesses utility, and (2) whether each is material wealth : 

a. Water. 

b. Diamonds. 

c. Sunlight. 

d. Candy. 

e. Air. 

/. Tobacco. 

7. When do goods reach the margin of utility? What effect 
has the point of satiety upon consumption ; upon production ? 

8. Name and define the factors of production. 

9. Explain the relative importance of the factors of produc- 
tion. 

10. Can there be any modern productive act without the partici- 
pation of all three of these factors ? Prove your answer. 



The Production of Wealth 79 

11. Explain the natural advantages enjoyed by the United States 
in regard to the possibilities of wealth production. Contrast her 
position with that of Germany. 

12. Explain the difference between natural resources and economic 
goods or wealth. 

13. Do natural resources possess utility ? What kind? 



PROBLEMS FOR DISCUSSION 

1. Compare the relative parts played by consumption and pro- 
duction in your own life. Give various illustrations. 

2. What connection has the theory of the indestructibility of 
matter with the principle of production? Do these two principles 
conflict ? 

3. Show whether utility is synonymous with usefulness. Prove 
your position by giving examples. 

4. Show the relation between the law of diminishing utility and 
the theory of price. 

5. Discuss the importance of production to civilization. 

6. Show the part played by each factor of production in the 
making of : a. Hats. b. Locomotives. c. Bread. d. Shoes. 
e. Books. 

7. How were ancient civilizations dependent upon natural re- 
sources ? Give examples from history. 

8. Why are modern civilizations still more dependent upon 
natural resources? Prove your point. 

9. Are natural resources sufficient to guarantee economic great- 
ness? What evidence is there for your statement? Give illus- 
trations. 

10. Contrast the factors of production with the characteristics 
of material wealth. Give examples of your meaning. 

n. Discuss the difference between natural wealth and material 
wealth. 

12. Account, on the basis of natural resources, for the present 
economic position of the more important European civilizations. 



80 American Economic Life 



SUPPLEMENTARY READING 

Clay, H. Economics, Chap. III. 

Ely, R. T. Outlines of Economics, Chap. VIII. 

Marshall, A. Principles of Economics, Book IV, Chap. I. 

Mill, J. S. Principles of Political Economy, Book I, Chap. I. 

Seager, H. R. Introduction to Economics, Chaps. VI and VII. 

Taussig, F. W. Principles of Economics, Vol. I, Chaps. II-V. 



CHAPTER IX 

Natural Resources or the United States 

I. Importance of land 
i. What "land" means 

2. How it determines activities 

3. How it aids man 

II. How nature favors the United States 

1. In soil and climate 

2 . Importance of soil : 

a. Law of diminishing returns : 

(1) The law stated 

(2) An example 

(3) Effects of this law 

b. America's advantage 

III. Minerals of the United States 

1 . Their importance 

2 . Kinds of minerals : 

a. Coal : 

(1) Supply and consumption 

(2) Kinds and uses 

b. Petroleum and gas : 

(1) Supply and consumption 

(2) A future problem 

c. Iron and copper 

d. Other minerals 

e. The outlook 

3. The conclusion 



>> 



Importance of Land. — In economics, the word " land 
is used synonymously with natural resources. It is taken 

81 



82 American Economic Life 

as typical of all natural resources because it is so representa- 
tive of nature. Land includes not only the materials of 
nature, such as forests and minerals, but also 

What ' 

" land " the forces of nature, such as the power of water- 
falls and the fertility of the soil. Again, land 
includes not only fields and meadows, but also rivers, 
lakes, bays, fish, forest, wild game, mines, and wells. In 
short, land includes all the gifts of nature, limited in extent, 
which exist in their present form without the expenditure 
of human labor. Most of this natural wealth is converted 
by productive operations into raw materials of industry. 

The character of natural resources determines the lines 
along which people direct their energies. Could Columbus, 

„ ., for example, when he first reached American 

How it r ' 

determines shores, have seen the vast continent with- all its 
latent possibilities, he might have predicted 
many of the transformations which have since taken place. 
Along the barren New England coast with its sharp, forested 
hills, thin soil, rivers, creeks, and bays, he would have 
observed the possibility of developing lumbering, ship- 
building, fisheries, commerce, and manufactures. In 
Pennsylvania, he would have seen that the pioneer would 
eventually employ coal, iron, and oil, and from these con- 
struct the new industry. Again, could he have traveled 
over the fertile valleys of the South with its congenial 
climate, he would readily have foretold that here was a 
basis for extended agricultural development. 

Natural resources assist in the development of civiliza- 
tion chiefly in four ways : (i) soil and climate furnish 
How it the basis for agricultural development ; (2) min- 

aidsman. era j resources furnish the basis of industry; 
(3) forests provide wood and conserve rainfall; and (4) 



Natural Resources of the United States 83 

water resources furnish transportation and power. Each 
of these will now be discussed at some length in this and in 
succeeding chapters. 

How Nature Favors the United States. — Nature has 
been free in her gifts to the United States, but perhaps no- 
where more so than in the wide range of climatic i n so n and 
and agricultural conditions which she has chmate - 
afforded. The fertility of the soil is remarkable. The 
land, stretching fifteen hundred miles north and south, 
makes possible a wide range of climate, further diversified 
by altitudes ranging from sea level to elevations of several 
thousand feet. The most southern part is parallel with 
the great Sahara, while the northern limits, exclusive of 
Alaska, are in the latitude of Germany. Most parts of 
this vast area, about the size of Europe, will support a 
variety of crops. Even where the amount of rainfall 
is inadequate, natural obstacles may often be overcome by 
irrigation. If varied climate is an aid to varied agriculture, 
there is no other section of the world in which a more 
effective combination of climatic and agricultural possi- 
bilities exists ; for, it must be remembered, climate is a 
basic resource which cannot be destroyed or materially 
altered by human wastefulness. Modern world powers 
have their homes in the temperate zone ; and it is fair 
to assume that, so long as the present forms of civilization 
prevail, cold, invigorating winters with warm, short sum- 
mers will combine to produce the greatest vitality and the 
most enduring energy. 

Soil itself is of such fundamental importance that we 
commonly refer to it as " mother earth." All organic and 
inorganic forms of life either spring from the earth, or 
are dependent upon it for existence, or are found within its 



84 American Economic Life 

bosom. Soil is the crust of the earth, its surface, and that 
which immediately lies beneath the surface. Soil is thus 
importance only a part of the earth, but it is that part which 
of soil: j s f greatest significance to civilization. If it is 

fertile, life will flourish; if depleted and exhausted, life 
will be difficult and precarious; and if barren, life will 
wither and fade away. Soil productivity, therefore, is the 
foundation of civilization. 

Since this principle of fertility or productivity is at the 
basis of progress and prosperity, it becomes important to 
Law inquire whether there is any economic law accord- 

diminishing ing to which the soil yields its return. It will be 
found that there is such a law, and that it applies 
not only to the surface of the earth, but to the wealth 
deeply embedded within the earth itself. This law, as 
applied to the soil, shows that, after a certain point has 
been reached in its cultivation, land will yield a smaller 
and smaller return in proportion to the labor and capital 
applied to it. This law is known as the law of diminish- 
ing returns from land and may be stated as follows : after 
a certain point has been reached in the cultivation of a 
given piece of land, it will be found that doubling the labor 
and doubling the capital applied to that land will not 
double the return from it. 

Take, for example, the case of a typical farm in the wheat- 
growing section of the country. We know that all pro- 
duction requires three factors : land, labor, and capital. 
Let us apply successive " doses " of labor and capital 
to a unit of this land and observe the effect upon the wealth 
produced, that is, the number of bushels of wheat which it 
will yield. The first unit of labor and the first unit of 
capital applied to this unit of land will yield, let us say, 



Natural Resources of the United States 85 

eight bushels of wheat. Two laborers and an additional 
unit of capital, in the form of more effective agricultural 
implements, will yield an additional twelve bushels of wheat, 
or twenty bushels altogether. It will even be found that, 
if we apply three units of labor and three units of capital 
(a rich fertilizer being added to the capital already in- 
vested) to this same land, it will produce sixteen additional 
bushels of wheat, or thirty-six bushels in all. So far, 
therefore, the results obtained from this application of 
labor and capital to the land may be represented by the 
following table : 



Land + Labor + Capital = Wheat 



I 


+ 


I 


+ 


$ 40 


I 


+ 


2 


+ 


$ 80 


I 


+ 


3 


+ 


$120 



8 bushels 
20 " 
36 " 



It will be observed from this table that we have succeeded, 
first, in doubling the original labor and capital and in more 
than doubling the original yield ; and, secondly, in tripling 
the original labor and capital and in more than tripling 
the original yield from the given unit of land. That is, 
in each case, the return from the soil has increased in greater 
proportion than the increase in the labor and capital 
applied to it. But here we reach the peak of production. 
If we apply another dose of labor and another dose of 
capital to this land, its return may increase, but not pro- 
portionately to the previous increasing returns from the 
land. The return may be increased absolutely, but not 
relatively. In fact, the time will come when it will not 
pay the farmer to attempt to produce more wheat from the 
acreage under cultivation. His land will, therefore, yield 
a proportionately diminishing return at some point in 



86 American Economic Life 

its cultivation. This decreasing ratio may be represented 
by the following table : 



Land + Labor + Capital = Wheat 



I 


+ 


4 


+ 


$160 


I 


+ 


5 


+ 


$200 


I 


+ 


6 


+ 


$240 



49 bushels 
57 " 
59 " 



Thus agriculture is subject to the law of diminishing 
returns, the consequences of which are far-reaching. To 
realize the full significance of this law, it must be remem- 
bered that it applies not only to the soil, but to mines, 
fisheries, water power, and other natural resources. When, 
therefore, a civilization begins to feel the effects of its 
operation, a decline in prosperity follows, unless forces 
counteracting its operation are discovered. The crumbling 
of ancient empires and the decline of Eastern and Mediter- 
ranean civilizations have been accounted for on this basis. 

But this law has been stated here chiefly for its historical 
significance, and in order to make us realize more forcibly 
America's the tremendous advantage enjoyed by the 
advantage. United States in this respect. Here and there, 
undoubtedly, one may observe the operation of this law in 
America. For example, in certain mining industries the 
return has declined in proportion to the labor and capital 
applied; and in specific agricultural districts, because of 
inadequate soil conservation, the yield has decreased in 
proportion to the labor and capital applied to the soil. 
But these are only isolated instances which, indeed, it is 
most important to bear in mind when considering the 
necessity for conservation in our national life. When, 
however, we consider the remaining undeveloped natural 
resources of the United States, its still fertile soil and un- 



Natural Resources of the United States 87 

touched mineral deposits, we realize more than ever the 
advantage which this nation enjoys, as compared with the 
civilizations of the Old World, in regard to the operation 
of the law of diminishing returns. Furthermore, American 
inventive genius is always struggling to counteract this 
law wherever its operation is noticeable. 

Minerals of the United States. — If, now, we look under 
the surface of the earth, we shall find that nature has 
equally endowed the United States with rich Their im- 
mineral deposits. This kind of resource has P° rtance - 
always been of value to mankind, but it is only with the 
advent of modern industry that it begins to assume its 
greatest importance. In primitive civilizations, stone, 
bronze, iron, tin, zinc, gold, silver, and other minerals 
were used for ornaments, for weapons, and for like purposes. 
In advanced civilizations, however, minerals determine 
largely the direction of national progress and the extent of 
national prosperity. 

For convenience of discussion, minerals may be divided 
into two groups : fuels and ores. Of the fuels, coal is by 
far the most important. As a factor in pro- Ends of 
mo ting prosperity, it is second to none of the minerals: 
minerals in its threefold function of providing 
heat, light, and power. One hundred years ago the nation 
had a supply of coal paralleled only by that of China. 
To-day, however, some authorities tell us that, at our 
present rate of increase in consumption, the available 
supply of anthracite coal may be exhausted in fifty years 
and the available beds of high-class bituminous coal in 
about one hundred and twenty-five years. In striking 
contrast to this alarming prediction, the United States 
Bureau of Mines estimated in 1920 that the supply of 



88 American Economic Life 

minable coal in the United States amounted to 3,553,673,- 
100,000 tons, or enough to last seven thousand years at 
the present rate of consumption. It is probable that both 
of these estimates are exaggerated. 

Coal exists in three forms : anthracite, bituminous, and 
lignite. Anthracite coal contains the highest percentage 
of carbon and is the most valuable as fuel. The avail- 
able fields of anthracite, located in Pennsylvania, are 
being gradually exhausted. Bituminous coal, which con- 
tains less carbon and is less desirable for domestic consump- 
tion, can be used for almost all commercial purposes. 
Furthermore, it exists in nearly all parts of the country. 
The third form of coal, known as lignite, consists of vege- 
table matter which has undergone chemical change and is 
much less valuable commercially. Vast fields of this 
lignite have been found in the Northwest. If its use can 
be made commercially profitable, it may be the coal of the 
future. 

The other mineral fuels, petroleum and natural gas, 
which have been discovered in connection with most of the 
Petroleum coa l fields, are being rapidly utilized. Already 
and gas. abundant supplies in Pennsylvania have been 
depleted. Ohio, Indiana, Illinois, and West Virginia are 
failing to increase their supply; and the time may soon 
come, perhaps within a quarter century, when the better 
forms of petroleum and natural gas in this country will be 
commercially unusable because of their scarcity and high 
price. In fact, in 1920, it was estimated that only 7,000-, 
000,000 barrels of oil were remaining in the United States, 
or enough to last eighteen years at the present rate of con- 
sumption. However, in the Southwest,' many new forms 
of petroleum have been discovered which may, with the 



Natural Resources of the United States 89 

advance of chemistry, replace and supplement the better 
grades now in use. 

This question of the diminution of the fuel supply pre- 
sents a serious problem. When men first lived in the 
temperate zone, they depended upon wood and peat for 
fuel. As civilization advanced, coal and oil came into 
use. With the exhaustion of these fuels, the temperate 
dwellers will be face to face with the problem of keeping 
warm in winter. Without some form of artificial heat, 
life in the temperate zone is impossible. What, then, 
shall civilization do ? Furthermore, since modern industry 
is dependent upon power, mechanically produced, the 
future must discover some substitute for the vanishing 
mineral fuels. Though the immediate future is by no 
means certain, water power may ultimately prove an ade- 
quate substitute ; while solar and tidal energy are as yet 
unknown quantities. 

Among the mineral ores, iron and copper are by far the 
most important, and the apparent supply of these minerals 
is far larger than the available supply of coal. Iron and 
Originally, bog ore was taken from the lowlands c °PP er - 
of New Jersey and Virginia and converted into iron and 
steel products. This bog ore industry was then displaced 
by the ore mines of Pennsylvania, which, in turn, have 
been supplanted by the ore fields of the Lake regions. In 
these latter fields, the ore lies on the surface and is fre- 
quently shoveled by means of steam power into cars, in 
exactly the same way that a gravel bank is removed. 

Gold, silver, tin, lead, zinc, cement, brick clay, and stone 
are also produced in considerable quantities other 
throughout the United States. While less im- minerah. 
portant than iron, they nevertheless play a leading part in 



90 American Economic Life 

determining the progress of an industrial civilization. 
Especially is this true of cement, brick clay, and stone, all 
of which are particularly valuable in structural operations. 
These mineral ores together with the mineral fuels consti- 
tute the most exhaustible form of natural resources. A 
forest which is burned away may be replanted 
and replaced, but each ton of coal or iron which is 
mined is irreplaceable. It has disappeared, and, although 
some substitute for it may be found, the coal or the iron 
itself will never, at least in historic times, be replaced. 
Too much emphasis, therefore, cannot be laid upon the 
necessity for conserving minerals. When the coal is 
mined, all of the coal in the mine should be removed. The 
policy frequently followed of removing the easily mined 
coal and then permitting the mine to fall in, thus sealing 
up millions of less desirable fuel, is disastrous. Mineral 
resources are at the basis of every modern industrial 
society, and the welfare of both industry and society 
demands conservation. 

We have seen, from this brief review of our soil and 
mineral resources, that, so far as they are concerned, 
The con- nature has amply endowed the United States 
elusion. with the basis of progress and prosperity. Her 
great extent of territory, her fertility of soil, her variety of 
climate, her great mineral wealth still capable of conserva- 
tion, all lead us to this conclusion. 

QUESTIONS FOR RECITATION 

i. Define land. Give examples. 

2. Show how land has affected the division of occupations in the 
United States. 

3. What are the four chief ways in which land aids man? Ex- 
plain each. > 



Natural Resources of the United States 91 

4. Why is climate so important ? Compare it with other natural 
resources. 

5. Explain the relation between climate and efficiency. 

6. Why do we speak of "mother earth"? 

7. Explain the importance of soil. 

8. Explain the law of diminishing returns from land, giving 
examples. 

9. Is this law in operation generally throughout the United 
States ? Defend your position. 

10. Name the chief minerals of the United States in what you 
regard as the order of their importance. 

1 1 . What are the minerals most essential to industry ? Why ? 

12. Show why the conservation of minerals in the United States 
is absolutely imperative. 

13. Explain the different kinds and uses of coal. 

14. What mineral is coming into greater prominence? Why? 

15. What problem does the future have in store for us? In what 
ways may it be solved ? 

PROBLEMS FOR DISCUSSION 

1. What is meant by the "economic interpretation of history"? 

2. What physical reasons account for the greatness of Holland? 
Of Japan? Why did the former nation develop earlier than the 
latter? 

3. When do natural resources cease to be free gifts of nature and 
become economic goods ? Give examples. 

4. What relation exists between the shape and location of land 
masses and man's development ? 

5. Why did civilization begin in semi-tropical regions and then 
move northward ? 

6. What other force, besides nature, is essential to the develop- 
ment of national life and character? Give examples to show its 
vital importance. 

7. What are the chief natural resources of the United States? 
In respect of what resources is the United States preeminent ? 

8. Of what use is land to the lumberman ? to the manufacturer? 
to the shopkeeper? to the traveling salesman? to the fisherman ? to 
the aviator? 



92 American Economic Life 

o. Why are iron and coal called the foundation stones of industry ? 
10. Discuss the evil effects of the law of diminishing returns from 
land. Show by historical allusions. 

n. Explain the forces counteracting this law. 

12. Give specific instances of the operation of this law in the 
United States. 

13. Should we or should we not emphasize this law in our teach- 
ing of economics ? Why ? 

SUPPLEMENTARY READING 

Annals American Academy of Political and Social Science, Conser- 
vation of Natural Resources. 

Patten, S. N. The New Basis of Civilization, Chap. I. 

Proceedings of the Conference of Governors (1908). 

Reports of National Conservation Commission. 

Shaler, N. S. Nature and Man in America. 

Smith, J. R. Commerce and Industry, Chaps. VII-IX, XV. 

Van Hise, C. R. Conservation of Natural Resources in the United 
States. 



CHAPTER X 

Land Reclamation 

I. Reclamation by means of irrigation 
i . How accomplished 

2 . First projects : 

a. Work of the Pueblos 

b. Work of the Mormons 

c. Operations in California 

d. The Horace Greeley project 

3. Recent development : 

a. Extent and value 

b. The Act of 1902 : 

(1) What it provides for 

(2) How expense is borne 

(3) Future possibilities 

(4) The work undertaken 

4. Advantages of irrigation 

II. Reclamation by means of drainage 

1 . How carried on 

2 . The swamp lands : 

a. Their extent and character 

b. The proposed work 

c. The Florida Everglades 

d. The Dismal Swamp 

e. Other swamp lands 
The problem before us 



Not only is it possible, by increasing the efficiency of 
labor and the productivity of capital, for progressive 

93 



94 American Economic Life 

civilizations to delay the operation of the law of diminishing 
returns, but it is even possible, through the application of 
labor and capital, to reclaim for cultivation land which is 
apparently useless. In other words, soil fertility may be 
increased, not diminished, by scientific methods of con- 
servation. This reclamation may take the forms of irri- 
gation and drainage. 

Reclamation by Means of Irrigation. — Irrigation is 
accomplished by the very simple process of transferring 
How accom- water from a place where it is not needed to a 
piished. place where it is needed. Water is thus given 
place utility. Practically any stream or body of water, 
which is properly situated, may be utilized for irrigating 
arid land ; or the water necessary may even be pumped 
from artesian wells. In this manner, vast stretches of 
parched territory may be brought under cultivation. 
Provided, therefore, there is somewhere available an ade- 
quate supply of water which may be transported through 
canals, irrigation is always possible wherever there is a 
shortage of rainfall. 

The first irrigation in America was undertaken by the 
Pueblo Indians and the Cliff Dwellers who lived in New 
First Mexico and Arizona. While their methods 

projects: were f t ^ e cm dest nature, their work was of 
^Pueblos and such a substantial character that farmers still 
Mormons. use some f their irrigation ditches. Scientific 
irrigation replaced these cruder methods when the Mormons 
under their great organizer, Brigham Young, began their 
conquest of the Utah desert. Starting just before the 
middle of the nineteenth century, the irrigation work of 
the Mormons has spread until it covers tracts in Utah, 
Wyoming, Idaho, and Arizona. 



Land Reclamation 95 

A further step in the development of irrigation was made 
during the gold rush to California. The miners built 
sluices to carry water for their mining. Some- 0i)erations 
times, when these sluices passed through fertile in 
land, they were tapped either by the miners or 
by the farmers. In this accidental way, the ultimate value 
of irrigation was conclusively demonstrated and the 
foundation laid for the irrigation systems which have 
helped to make California one of the garden spots of the 
world. 

The Horace Greeley Irrigation Colony, named after the 
man who was most interested in promoting it, was started 
in 1870 in Greeley, Colorado, and furnished the Horace 
nucleus of the irrigation " boom " of the eighties, project. 
During this boom hundreds of miles of canals were con- 
structed at a cost of millions of dollars. 

Since 1870 the growth of irrigation in the West has been 
rapid. In that year there were 20,000 acres irrigated ; in 
1880 the number of acres had increased to cent 
1,500,000; in 1890, to 3,631,000; and in 1900, growth: 
to 7,539,000. Of this irrigated land, eighty per Exteni and 
cent was devoted to the raising of crops and 
twenty per cent to pasture land. While the total cost of 
providing the irrigation for this seven and a half million 
acres was $67,770,000, the value of the crops in 1900 was 
$86,860,000, or a return in one year of about twenty-five 
per cent more than the total cost of irrigation. 

The greatest real gains, however, have been made since 
the passage of the National Reclamation Act of 1902, 
which provides for the construction of irrigation 

^ Actofigo2. 

works under the direction of the Secretary of 

the Interior. Such works are to conform to state laws and 



g6 American Economic Life 

to be developed in accordance with local conditions. In 
order to prevent the concentration of ownership of irrigated 
lands in the hands of a few individuals, holdings under the 
Act are limited to 160 acres for any one person. 

Under this Act of 1902 the expense of the construction 
and improvement of an irrigation system must be met from 
the sale of public land. In this way the work was started. 
The settlers who take up irrigated lands are required to 
pay to the government, in ten equal yearly installments, 
the cost of irrigation ; so that at the end of ten years the 
government has returned to it an amount of money equal 
to the amount spent the previous decade on the irrigation 
system. In order to insure a democratic method of 
administration, the irrigation plant is turned over to the 
community as soon as it has been paid for. Thus the 
responsibility for the successful management of the system 
rests on the local community rather than on the authorities 
at Washington. 

In the aggregate, the seven and a half million acres of 
irrigated land sounds like a great amount ; but, when 
compared with the possibilities of developing systems of 
irrigation, it is only a small beginning. There are approxi- 
mately seventy million acres of arid or nearly arid land 
which may still be irrigated. The work already done, 
therefore, covers a little over one-ninth of the irrigable 
land of the country. 

Since the passage of the National Reclamation Act of 
1902, the government has undertaken the construction of 
irrigation projects which will irrigate about five million 
acres of land, or an area equal to the present total acreage 
of crops in Connecticut, Massachusetts, New Hampshire, 
and Florida. 



Land Reclamation 97 

The advantages of irrigation are best seen by a com- 
parison of the conditions under which farmers in the East 
and in the West are obliged to work. An Eastern 
man, who recently visited some of the Western of 
irrigated lands, was asked on his return what imga on ' 
he thought of the Eastern agriculture as compared with 
that of the West. " Oh," said he, " it is a poor substitute 
for irrigation." Continuous sunshine and a sufficient water 
supply, furnished when wanted and in exactly the right 
quantities, form a sharp contrast to the fickle climate of 
the East. 

Reclamation by Means of Drainage. — The reclamation 
of land by drainage, which constitutes a main feature of 
the Act of 1902, is in no sense less important How car- 
than the work of irrigation. The eight million ried on - 
acres of land which have been drained up to the present 
time have been reclaimed chiefly through private State 
initiative. The national government has done practically 
nothing in this direction. 

In the United States there are over sixty million acres 
of swamp or overflowed lands. The notable thing about 
swamp land is that it is frequently of very high 
quality. Take, for example, the swamp lands lands: 
along the Mississippi. They consist of rich. Extent and 

„■ , t , . , , i . character. 

deep soil that has been deposited by the river 
throughout the ages. This soil is formed of the finest silt, 
the scourings of many different kinds of rocks carried down 
from the headwaters of the Mississippi and its tributaries. 
When, in contrast to this, one considers that in certain 
sections of the country farmers are attempting to raise 
crops on poor soil eight or ten inches in depth, it will 
readily be seen that swamp lands when drained will present 



98 American Economic Life 

opportunities far superior to those now offered by the 
average farm land. 

At the session of 1 905-1 906, Congress appropriated 
$15,000 for the purpose of surveying the swamp lands on 
The pro- the ceded Chippewa Indian reservations in 
posed work. Minnesota. The report on the survey shows 
that it is possible to drain 267,000 acres of land and to im- 
prove 135,000 additional acres. The total cost of this work 
is estimated at slightly over $1,000,000, while the cost per 
acre will vary from $1.62 to $3.23. Since this is* a region 
in which drained lands are worth from $12 to $15 an acre, 
the government can readily afford to invest in the project. 

Perhaps the two best known swamps are the Florida 
Everglades and the Dismal Swamp of Virginia. The 
The Florida Everglades is a swamp during the wet season 
Everglades, qj^ anc j even ^ en there are stretches of 
prairie. These, however, are rendered inaccessible by the 
water runs. Some private attempts have been made to 
drain the Everglades, and these have been singularly 
successful. The soil, consisting of silt and decayed vege- 
table matter, ranges from three to fifteen feet in depth and 
is remarkably rich. The Everglades cover more than three 
million and a half acres, a large portion of which is drain- 
able at reasonable expense. 

The Dismal Swamp is covered by patches of water 
which are seldom more than two or three feet in depth. 
The Dismal Like the Everglades, the Dismal Swamp pre- 
Swamp. sents no serious engineering difficulties. It is 
merely a big project which must be handled on a large 
scale and which consequently must not be left to in- 
dividual or state authorities. 

In Louisiana near New Orleans, in Minnesota, in North 



Land Reclamation 99 

Dakota, in the Red River Valley in Oklahoma, and in 
parts of California, considerable draining has been pri- 
vately undertaken and has met with great sue- other swamp 
cess. But reclamation projects, like those of lands - 
irrigation, must be undertaken on a scale which is too vast 
for individual enterprise and which can be most justly and 
equitably administered only by an agency of the Federal 
government. 

There are over 70,000,000 acres of land available for 
cultivation and wonderfully rich in productive power, if 
only water can be supplied to them in sufficient The 
quantities. On the other hand, there are an- lem before 
other 60,000,000 acres which will become won- 
derfully productive, if they can be properly drained. The 
problem of supplying the water in one case and of remov- 
ing it in the other is intricate, demanding careful study, 
highly specialized mechanical appliances, and vast outlays 
of capital. It is therefore apparent that such conditions 
can be best met, not by individual or state action, but only 
by the effective power and authority of the central govern- 
ment. 

QUESTIONS FOR RECITATION. 

1. Define land reclamation ; irrigation. 

2. Why is land reclamation important? 

3. How may irrigation be accomplished? 

4. What was the earliest irrigation project in America? 

5. Explain the later projects of the nineteenth century. 

6. Give the provisions of the Act of 1902. 

7. What are the advantages of irrigation? 

8. Where are the principal swamp lands of the United States? 

9. How has the drainage of swamp lands heretofore been chiefly 
provided for ? 

10. What problem confronts the United States with regard to 
both phases of land reclamation? 



ioo American Economic Life 



PROBLEMS FOR DISCUSSION 

i . What does irrigation show us in regard to man's control over 
his environment ? 

2. Is the government interfering with a "divine plan" when it 
irrigates barren land ? 

3. In what sense is Eastern agriculture "a poor substitute for 
irrigation"? 

4. Why was irrigation not taken up by the government earlier 
in the history of the country ? 

5. What is yet to be accomplished by means of irrigation? 

6. Is it better to irrigate the land of the United States or to go 
over into Canada and take up the "free land"? 

7. Has the purpose of the Act of 1902 been accomplished? 

8. Why are swamps so rich? 

9. Why are they not more extensively drained and used? 

10. On what grounds can the national government justify its 
activities in the reclamation of land ? 

ii. Show what has been accomplished in Europe in regard to 
land reclamation. 

12. Discuss the relation between rainfall and density of popula- 
tion. 

13. Discuss the relationship existing between land reclamation 
and the law of diminishing returns. 

SUPPLEMENTARY READING 

Annals American Academy of Political and Social Science, Conser- 
vation of Natural Resources. 

Harwood, W. S. The New Earth, Crap. XIII. 

Proceedings of the Conference of Governors (1908). 

Reports of National Conservation Commission. 

United States Census Reports on Irrigation. 

Van Hise, C. R. Conservation of Natural Resources in the United 
States. 



CHAPTER XI 

Forest Conservation 

I. The forests of the United States 
i. Their importance 

2. Groups of forests : 

a. The Northeast Forest 

b. The Southern Forest 

c. The Lake State Forest 

d. The Rocky Mountain Forest 

e. The Pacific Coast Forest 

3. Consumption of wood 

II. The destruction of forests 

1 . The causes : 

a. Effect of early attitude 

b. Forest fires 

2. The effects: 

a. On the wood supply 

b. On freshets and floods 

c. On washouts 

d. On droughts 

e. On water power 

3. The remedy 

Forests of the United States. — Forest resources, when 
properly conserved, constitute one of the greatest sources 
of national prosperity and social welfare. Al- Their im- 
though forests are usually thought of as sources P° rtance - 
of lumber supply, their greatest value lies in the part they 
play in the conservation of soil moisture. While lumber is 



102 American Economic Life 

important and production at times depends upon it, 
substitutes for wood may be found. But for soil moisture 
there is no substitute ; every crop of grain, vegetables, and 
fruit depends upon it. Its conservation, therefore, is a 
matter of utmost importance. In addition to maintaining 
soil moisture, forests, by insuring a regular stream flow, 
guarantee constant water power and regular water trans- 
portation. Considering, therefore, their direct and in- 
direct value, forests serve as many useful purposes as any 
other natural resource. 

A forest survey of the United States shows that five 
groups of states embrace the naturally timbered areas 
Groups of of the country, — the Northeastern States, the 
forests: Southern States, the Lake States, the Rocky 
Mountain States, and the Pacific States. 

In the Northeast district the present stand is mainly 
spruce, and second growth of white pine, hemlock, and 
The North- hardwoods. For many years the most char- 
es* Forest, acteristic tree of this forest was the white pine, 
a tree that has long enjoyed great commercial importance. 
The chief district where this tree grows in marked abun- 
dance is in the confines of northern United States. This 
white pine is soft, light, easily worked, suitable for the 
cabinetmaker, joiner, carpenter, and pattern maker. 
Formerly this wood was used for general construction to a 
greater extent than any other wood in the United States. 
But white pine is now becoming so scarce that the best 
grades have risen in price enormously. In this North- 
eastern Forest another tree is worthy of special mention, 
— the spruce, which is extensively used for wood pulp. 

In the South are found four types of forest, which, broadly 
speaking, may be said to divide the land among them 



Forest Conservation 103 

according to elevation above sea level. The swamp forests 
of the Atlantic and Gulf coasts and the bottom lands of 
the rivers furnish cypress and hardwoods. The The South- 
remainder of the coastal plain from Virginia em Forest. 
to Texas was originally covered with Southern or " yellow " 
pine, — the trade name under which the lumber of several 
pines is marketed. The plateau encircling the Appalachian 
range and the lower part of the mountain region itself 
support a hardwood forest, while the higher ridges are 
occupied by conifers, — mainly spruce, white pine, and 
hemlock. 

The Lake States still contain many hardwood forests 
in their southern portions. In the north the The Lake 
coniferous forest includes, besides the rapidly state ForesL 
dwindling pine, considerable tamarack, cedar, and hemlock. 

The forests of the Rockies occupy isolated mountain 
chains separated by grazing lands, deserts, or cultivated 
valleys. The location of these isolated patches 
of forests is determined largely by the degree Mountain 
of moisture and the extent of forest fires. The 
chief timber trees of this belt are Western yellow pine, a 
species of spruce, and the red fir. 

The last great stretch of woodland is the Pacific Coast 
Forest, extending along the coast west of the Rocky Moun- 
tain Forest, and running through the states The Pacific 
of California, Washington, and Oregon. This Coast Forest. 
forest is the most densely timbered of any in the country, 
perhaps in the world. The characteristic trees of the 
district are of the fir species, especially that known as the 
Douglas fir. Other trees found in addition to the Douglas 
fir are the Western hemlock, Western yellow pine, red- 
wood,, and cedar. Thus the forest areas of the United 



104 American Economic Life 

States contain a wide range of both conifers and hard- 
woods. 

The United States was endowed originally with rich 

forest resources ; but, like a spendthrift, the nation has 

consumed these riches in an extravagant fashion. 

Consump- , 

tion of According to government figures the population 

wood- of the United States from 1880 to 1900 increased 

fifty-two per cent, while the increase in lumber cut during 
the same period was no less than ninety-four per cent. Our 
present annual consumption of wood in all forms is more 
than three times as great as the annual growth of our 
forests. So great has been this increase in the consumption 
of wood that the source of supply has steadily shifted west- 
ward, until to-day the product of the Pacific States furnishes 
a large proportion of the total output of the country. 

Destruction of Forests. — Because so many forest tracts 

have been cut over and left desolate, the United States 

has now reached a point where its remaining 

Causes : 

E ff ect f forests are vitally important. This forest 
early destruction may be said to have resulted origi- 

nally from the effect of our early attitude 
toward forests. To the American settler the forest was 
an enemy. Not only did it stand in the way of the develop- 
ment of agriculture, but it sheltered Indians and wild 
beasts. Therefore, the early settler naturally said, " Why 
take care of an enemy ? " Accordingly, he began, as rapidly 
as possible, to clear the land of forests and to devote it to 
the purpose of sustaining life. In this way a habit of mind 
was engendered that has had its logical outcome in the ac- 
tion of the " timber butcher," who clears the land of 
everything " ten inches through and eighteen inches from 
the ground." 



Forest Conservation 105 

Another cause of the destruction of forests is the spread 
of forest fires, against which little, if any, scientific means 
of prevention has been taken. This loss from fire 
has been estimated at fifty million dollars an- 
nually. In unsettled districts the sparks from locomotives 
start these fires, which, unchecked, except by adverse wind 
and natural barriers, gain good headway before they are 
discovered, and burn over thousands of acres of forest land. 
This was the case in 1893 with the Hinckley fire in Min- 
nesota, which destroyed millions of dollars' worth of prop- 
erty and hundreds of lives. This fire smoldered for two 
weeks before a high wind came and drove it fiercely through 
the forests. At any time during these two weeks, an effort 
on the part of skilled foresters could have extinguished the 
fire and saved the lives and property later sacrificed. 

What, now, are the effects of this willful destruction of 
forests? Naturally the first result of the ruthless cutting 
and destruction of timber is to deprive the com- Effects : On 
munity of its supply of wood. Experts tell us wood su PPh- 
that, at our present rate of consumption, our supply of 
commercial timber will last but another generation. This 
problem, while very serious in itself, might be solved 
through the importation of wood, or the gradual replanting 
of forest areas. There is, however, another phase of this 
question still graver in aspect. 

When a mountain range is cut clean of timber, the brush 
and limbs are left scattered over the bare tract. A dry 
season comes and a passing hunter drops a on freshets 
match, or a locomotive throws a spark, among and fl° ods - 
this brush. The consequence, as we have seen, is a forest 
fire. The fire, supplied with the most combustible materials 
in the way of dried branches and leaves, burns fiercely. 



106 American Economic Life 

Most of the vegetable matter is removed from the top of 
the ground, and the surface of the earth is baked hard. 
Then comes a rain, which, instead of soaking into the 
ground as it ordinarily does in a wooded district, runs off 
rapidly into the streams, causing a freshet. If the rain has 
been extensive enough and has covered a large tract of 
deforested country, the result is a flood of serious pro- 
portions. 

Again, in agricultural districts where the timber has 

been cut from the top of hills, a heavy rain, running off 

rapidly, washes the soil from the slopes down 

On washouts. , . 

into the valleys. One of the great problems 
which mountain farmers, who have allowed their timber 
to be removed, now face is that of preventing washouts 
on the sloping fields. 

There is still another phase of the problem. As it 
exists in nature, the spongy vegetable matter in the forests 
holds the water which falls in rainy seasons, 
and allows it to filter gradually off into the 
springs and streams during the drier times. Where forest 
areas have been destroyed, drought is becoming a serious 
problem in many agricultural regions during the late 
summer months. In districts where forests have been 
removed, men are surprised to find that springs and 
streams dry up in the summer. 

Finally, the results of deforestation are not all direct. 
The industries of the country are depending more and 
On water more upon water power as a motive force. In 
power. districts where turbines have been set up and 

water power is being converted into electricity, low streams 
in the dry summer months force the factories to close tem- 
porarily. One of the greatest drawbacks to generating 



Forest Conservation 107 

power on small streams, therefore, is the fact that they are 
flooded with water in the spring and empty in the fall. 
If there were timber land at the headwaters, both condi- 
tions would be obviated. 

Thus we see that a shortage of timber supply, with a 
consequent rise in the price of lumber, disastrous freshets 
and floods, the washing away of sloping lands, and the 
failure of springs and streams are all phenomena resulting 
from deforestation. 

These evils can be remedied only by a vigorous policy 
of conserving our existing forests, and by entering upon 
a national campaign of reforestation. If, at The 
our present rate of consumption, the timber remed y- 
supply of the country will last but a generation, it is 
absolutely necessary that every stick of it should be 
guarded ; that it should not be wantonly destroyed through 
forest fires or timber cutting ; and that proper provision 
should be made for replacing every tree consumed. To 
meet this situation state action is inadequate ; a compre- 
hensive national policy is imperative. The United States 
must follow the example of European countries and insist 
upon a rigid policy of conservation of its remaining forest 
areas. 

QUESTIONS FOR RECITATION 

1. Explain the importance of forests. 

2. Describe the chief groups of forests in the United States. 

3. What are the uses of white pine? Where is it found? 

4. What woods have the widest use commercially? Where 
are they found ? 

5. Where are the largest trees found in the United States? Of 
what use are they? 

6. Compare our yearly consumption of wood with the annual 
growth of trees. 



108 American Economic Life 

7. Show the necessity of conserving our forests. 

8. What was the attitude of the early settler toward forests, 
and what was its effect ? 

9. Show how forest fires originate and the harm they accom- 
plish. 

10. Discuss the chief effects of the destruction of forests. 

11. Describe the remedy for the evils of deforestation. 



PROBLEMS FOR DISCUSSION 

1. Contrast two regions in the United States, — one where forests 
have been destroyed, the other where forests have been conserved. 

2. Discuss what scientific forestry means. 

3. Describe the forestry service of France or Germany. 

4. What would scientific forestry do for the United States ? 

5. What steps have thus far been taken? 

6. Apply the law of diminishing returns to forests. 

7. Discuss the work of Gifford Pinchot. 

8. What justification can be advanced for government forest 
reserves ? 

9. Outline the chief points in a comprehensive policy of forest 
conservation. 

10. Outline the economic advantages of preserving the forests. 

11. Describe the work of your State University in forestry. 

12. Draw a map locating the great forest areas of the United 
States. 

SUPPLEMENTARY READING 

Annals American Academy of Political and Social Science. Con- 
servation of Natural Resources, 

Harwood, W. S. The New Earth, Chap. X. 

Pinchot, G. A Primer of Forestry. 

Smith, J. R. Commerce and Industry, Chap. X. 

Van Hise, C. R. Conservation of Natural Resources in the United 
States. 



CHAPTER XII 

Water Possibilities 

I. Water as a source of power 
i . Its early use 

2. Why used to-day 

3. Method of utilization 

4. Examples of utilization: 

a. At Niagara Falls 

b. On the Pacific Coast 

c. In the future 

5. The resulting problem 

6. The attempted solution 

II. Water as a means of transportation 

1 . Our inland waterways : 

a. Their great extent 

b. Their early importance 

c. Why valuable to-day 

d. Effect of Panama Canal 

e. Water transportation cheap 

2. Problems of the Mississippi River : 

a. The cutting of the banks : 

(1) The cause 

(2) The remedy 

b. The flooding of the river : 

(1) The cause 

(2) The remedy 

c. The cost of conservation 

3. General conclusion 

Water as a Source of Power. — One of the resources 
which the early colonists found in comparative abundance 

109 



no American Economic Life 

was water power. Throughout New England and in cer- 
tain parts of the South, there were innumerable streams 
its early which had a high gradient and from which 
use - considerable water power could be developed. 

Therefore, when manufacturing was begun in the colonies, 
the power used was naturally water power. The water 
wheel was set down directly in the stream, a race was 
constructed, and the revolving wheel was connected by 
belts and shafts with the machinery in the mill. 

However, the discovery of coal, the application of steam 
to industry, and the development of steam-propelled 
why used machinery, which came between 1750 and 1825, 
to-day. completely revolutionized the source of power 

utilized in American industries. When the great coal beds 
were discovered, there was an immediate rush to exploit 
them; and during the nineteenth century the United 
States occupied itself in mining coal as fast as it could be 
used in industry. With the advent of the twentieth 
century, however, a change occurred which very materially 
altered the situation. Coal, particularly anthracite coal, 
rose in price to figures which became almost prohibitive in 
certain industries. The situation was also aggravated by 
labor troubles which rendered the coal supply at times un- 
certain. In addition to this, experts declared that the 
available supply of coal in the United States might be 
exhausted in from fifty to one hundred and twenty-five 
years. At the same time, it was estimated that the 
development of water power in the United States would 
produce an equivalent of 780,000,000 tons of coal a 
year. 

Under these circumstances attention was directed toward 
the utilization of water as a source of power. The develop- 



Water Possibilities 



in 



ing knowledge of electrical appliances made possible a 
revolution in the methods of using water power. The 
old waterwheel was abandoned ; electrical tur- Method of 
bines were installed at the stream ; the water utilization, 
power was converted into electricity, and this was com- 
municated over wires for great distances. 

The most noteworthy instance of this conversion of water 
power into electricity is seen at Niagara Falls. Here are 
situated two plants. The one below the Falls Examples . 
on the American side is located in the Gorge. Niagara 
The water for its use is drawn from the upper Falls - 
Niagara River ; it then runs through the city of Niagara 
Falls and is discharged near the first Suspension Bridge. 
This plant is so situated as to be able to utilize a fall of 
two hundred and fifteen feet of water. However, it has 
certain obvious disadvantages. First, its buildings dis- 
figure the Gorge ; and, in the second place, the plant is 
difficult of access. 

The power plant above the Falls is a rather novel one. 
To construct it a pit one hundred and fifty feet deep is 
dug in the solid rock, and at the bottom of this pit the 
turbines are placed. The motion generated in the turbines 
is returned to the electric generators at the surface by 
means of steel shafts. The power generated at the Falls 
supplies not only the industrial plants in the immediate 
neighborhood, but the electricity is carried to Buffalo, 
where it is used as a source of power for trolley cars, for 
street and house lighting, grain elevators, and factories. 

While this is the most notable example in the country 
of the development of water power, the Pacific Coast also 
presents instances of its utilization. The important thing 
about Niagara Falls is the volume of its water. On the 



ii2 American Economic Life 

Pacific Coast there are no bodies of water so large, but 
the fall which is secured is very great. For example, a 
On the Pa- P art of the electric power used at San Francisco 
dfic Coast. j s SU ppHed from a plant located at the foot of 
a hill five hundred feet high, down which the water for the 
generation of the electricity is carried in steel tubes. The 
velocity of the water when it reaches the power plant is 
stated at fourteen thousand feet per minute. After the 
power has been generated in this plant, it is carried one 
hundred and fifty miles, at a pressure of from forty thou- 
sand to eighty thousand volts, with a loss of about one- 
fourth of the power. 

There are many other sections of the country where in 
the future the use of water power may become general. 
In the The falls at Sault Ste. Marie between Lake 

future. Huron and Lake Superior have a drop of only 

twenty feet, and yet the volume of water is so enormous 
as to make possible the development of a great amount of 
power. Likewise, the innumerable small rivers along the 
Atlantic Coast furnish in the aggregate a considerable 
source of water power. Again, those who propose regu- 
lating the flow of the Mississippi River by the construction 
of reservoirs at its headwaters estimate that from these 
reservoirs about fifty million horse power may be developed. 

The real impetus to the use of water power in modern 
industry was given in the last decade of the nineteenth 
The result- century, when it was found that, by means of it, 
ing problem, electricity might be cheaply generated and 
then carried great distances for commercial purposes. 
Indeed, the possibilities of water power have become so great 
that many conservationists who are working for the proper 
care of natural resources have shifted their emphasis from 



Water Possibilities 113 

the conservation of forests and minerals to that of water 
power. This they have done because they realize that 
individuals and corporations, through a monopoly of water 
power sites, might secure an unshakable grip on one of the 
most valuable natural resources of America. 

For the purpose of protecting these sites and at the 
same time to make possible the utilization of water power 
resources, Congress in 1920 enacted a water The 
power bill which permits the leasing of water attempted 
power sites by the Federal government. In this 
manner the solution of this vexatious problem is attempted. 
Under the provisions of this law a commission, consisting 
of the Secretaries of War, Agriculture, and Interior, is 
empowered to lease, up to fifty years, the water power 
rights on all public lands, forest and Indian reservations, 
and on navigable streams. With the lapse of the lease, 
the government has the option of taking over at an 
appraised valuation the plants that have already been 
constructed, or of re-leasing them, or of leasing them at 
the appraised valuation to any company the commission 
may choose. Thus the property rights remain with the 
government, arid the water power commission is authorized 
to specify the royalties to be paid the government under 
the leases. In the West, where water power sites are 
plentiful, the application of this law is especially valuable 
to social development. 

Water as a Means of Transportation. — Quite a different 
problem is presented by water transportation. Here, 
there is no danger of monopoly, since the ownership of the 
transportation facilities already lies in the government. 
In the United States, therefore, the problem of water trans- 
portation is solely a problem of wise use and development. 



ii4 American Economic Life 

Nowhere in the world is there a duplicate of the inland 
waterways of the United States. On the north lie the 
ini nd Great Lakes, which provide eighteen hundred 

waterways : miles of navigable water ; on the east and west 
Their great coasts are numerous small navigable streams. 

extent. . 

In the heart of the continent, reaching into 
twenty- two of the states, is the Mississippi River System, 
which is navigable for more than a thousand miles. Al- 
though the twenty- two states reached by the Mississippi 
River System furnish by far the greater part of all the 
exports of the United States, the bulk of the agricul- 
tural products, and more than half of the manufactured 
products, the river system is but little used for trans- 
portation. 

The early colonists depended upon water transportation, 
as they did upon water power, because of the abundance 
Their early of water and also because there was no other 
importance. eaS y means f getting from place to place. The 
few roads that existed were wretched. Therefore the 
streams became the highways of trade and travel, and 
settlements were made either on the coast or along the 
rivers. 

The application of steam to industry led to the gradual 
abandonment of both water power and water trans- 
Wh portation. In both cases, however, the time 

valuable has now been reached when steam- power will 
no longer suffice ; and, in order to maintain our 
industrial efficiency, it has become necessary to fall back 
upon natural power. In both cases, likewise, the diminu- 
tion of the coal supply has played a leading part in the 
utilization of water. In the case of transportation, how- 
ever, there is another factor of perhaps greater importance. 



Water Possibilities 115 

In prosperous years the railroads of the country are unable 
to handle the freight traffic. Some other means of trans- 
portation is therefore imperative. 

The value of our inland waterways has been enhanced 
by the opening of the Panama Canal and by the develop- 
ment of trade with South America. This com- „ t , 
bination of circumstances makes the Gulf the Panama 
natural outlet for a great amount of the produce 
of the Mississippi Basin. If to this fact is added the ease 
with which heavy freight may be shipped by water, it is 
plain that logically a great portion of the Mississippi 
Basin's heavier products will go to the Gulf by water. 

The system of inland waterways and the network of 
regional canals combine to produce a vital effect upon the 
cost of transportation. Some idea of the 
relative cost of shipping by water and by rail portation 
may be gained by a comparison of the rates 
charged for the transportation of iron ore in the Great 
Lakes region. Between Pittsburgh and Lake Erie there is 
a commerce, composed chiefly of iron ore and coal, amount- 
ing annually to about 30,000,000 tons. The ore is carried 
by boat from Duluth on Lake Superior to Ashtabula on 
Lake Erie, a distance of one thousand miles, for about 
eighty cents per ton. The ore is then loaded on cars and 
carried to Pittsburgh, a distance of one hundred and thirty- 
five miles, for ninety cents per ton, so that it costs ten 
cents more to ship a ton one hundred and thirty-five miles 
by rail than it does a thousand miles by water. While 
these rates are constantly changing with cost of operation, 
it is always true that it costs much less to transport goods 
by water than by rail. The great danger here, however, 
lies in the fact that railroads endeavor to eliminate the 



n6 American Economic Life 

cheaper competitor by taking the water routes under 
their own control. 

Thus water transportation possesses inherently a de- 
cided advantage over land transportation. To realize 
the full possibilities of transportation by water, 
Mississippi however, we must make many improvements in 
the Mississippi River. In fact this river presents 
some serious problems. It is a stream of bad habits, the 
worst of which are the cutting of its banks, the formation of 
sand bars in its channel, and the severity of its floods. 

The cutting of the banks is due to curves, technically 
called " meanders," and to the river's digging under the 
Cutting of bank on the outside of the curve, particularly 
the banks. during flood times. Sometimes this cutting 
amounts to one hundred or one hundred and fifty feet a 
year. Since the channel is necessarily on the outside of 
the curve, and since grain elevators, docks, and other 
instruments of traffic must be reached by means of this 
channel, it is obviously impossible to carry on commerce 
satisfactorily if the river is undercutting the docks and 
elevators at the rate of one hundred feet a year. 

The river can never be successfully prevented from 
cutting its banks until it is straightened. This may seem 
almost impossible ; but several European rivers which 
were particular offenders in this respect were made narrower, 
the change resulting in a higher gradient and a more rapid 
current. 

Besides straightening the river, we must control its 
seasonal floods. Spring floods and summer droughts are 
Flooding of due in great part to the deforestation of the 
the nver. mountainous country at the headwaters of 
rivers. Great areas of land at the headwaters of the 



Water Possibilities 117 

Mississippi and its tributaries have been practically de- 
forested. Consequently, in rainy seasons, the water 
rushes off from the soil into the streams and causes flood 
damage farther down. Reforestation would eliminate 
much of this danger. The work may be further facilitated 
by the building of storage dams, which will check the 
floods and allow the surplus water to flow gradually down 
through the lower courses of the river. 

The straightening of the Mississippi, the reforesting of the 
hills at its headwaters, and the building of storage dams 
on its principal tributaries to control floods may Cost , 
cost two hundred or even three hundred million conser- 
dollars ; but, if the full possibilities of the 
Mississippi Basin are to be realized, sooner or later these 
changes must be made. The development of water trans- 
portation will involve in the United States, as it has in- 
volved in Europe, a great outlay of capital ; but, if the 
experience of England and Germany furnishes any basis 
for judgment, the outlay, even though it be a great one, 
will be more than justified. 

We have now completed our survey of the first factor of 
production, — the land of the United States. We have 
examined the typical resources of the nation, General 
its fertile soil, its varied climate, its great c ° ncl usion. 
mineral deposits, its forest resources, and its water possi- 
bilities. We have seen that nature has been prodigal in 
her gifts to America, and that man has often been equally 
prodigal in his use of these gifts. Conservation, in the 
form of irrigation, wise use, and thrift, is therefore essen- 
tial to national well-being. But, through the efforts of 
the proponents of this ideal, the awakening of the social 
conscience has been accomplished in time to fulfill its 



n8 American Economic Life 

purpose. So far as the natural resources of the United 
States are concerned, it is therefore possible for the Amer- 
ican people to achieve national prosperity and individual 
welfare. 

QUESTIONS FOR RECITATION 

i. Why was water power used extensively by the early colonists ? 

2. What led manufacturers to replace water power by steam? 

3. What has caused the present tendency toward the increased 
use of water power ? 

4. Describe the modern method of utilizing water power. 

5. Give examples of modern utilization of water power in the 
United States. 

6. What problem has arisen from the modern use of water power ? 
How has Congress attempted to solve this problem ? 

7. Describe the largest inland water system in the world. 

8. Why was water transportation originally of special im- 
portance? 

9. Why is water transportation important to-day? 

10. Explain the effect of the Panama Canal upon inland water 
transportation in the United States. 

11. Show why water transportation is cheaper than land trans- 
portation. 

12. Discuss the problems of the Mississippi River. 

13. What method should be followed in solving these problems? 
Why? 

14. What conclusions do you draw from a study of the natural 
resources of the United States ? 

PROBLEMS FOR DISCUSSION 

1. Discuss the advantages of modern water power over modern 
steam power. 

2. What advantage has steam power over water power? 

3. In what respect does a reversion to water power show progress ? 

4. What steps must be taken to secure the most economic use of 
water power? 



Water Possibilities 119 

5. How important were inland waterways before 1830? 

6. Contrast the relative merits of the railroad and the inland 
waterway. 

7. Why are the people of the United States laying new em- 
phasis on inland water transportation ? 

8. Name the leading inland waterway systems of the United 
States. 

9. Apply the law of diminishing returns to water power. 

10. Discuss the reasons for the conservation of water power sites 
in the United States. 

11. Discuss the effects of the Panama Canal upon world com- 
merce. 

12. How may water and other natural resources be developed and, 
at the same time, the interests of the public be protected? 

13. Does conservation of the vast resources of Alaska mean a 
locking up of these resources ? Explain. 

SUPPLEMENTARY READING 

Annals American Academy of Political and Social Science. Con- 
servation of Natural Resources. 

Johnson, E. R. Ocean and Inland Water Transportation. 

Smith, J. R. Commerce and Industry, Chaps. IX, XVI, and XL VI. 

United States Census Reports. Water Power. 

Van Hise, C. R. Conservation of Natural Resources in the United 
States. 



CHAPTER XIII 

The Nature of Labor 

I. Labor as a factor of production 
i. Importance of labor : 

a. In production 

b. In the city 

c. In the country 

d. In modern industry 
2. Meaning of labor : 

a. Examples 

b. The moral element 

c. The final test 

II. How labor's productivity may increase 
i. Increase in efficiency : 

a. Why important 

b. How effected : 
(i) Negatively 
(2) Positively 

2. Increase in numbers : 

a. Through natural increase : 

(1) The Malthusian Law 

(2) Checks on population 

b. Through immigration 

3. The conclusion 

Labor as a Factor of Production. — While there are 
three factors of production, — land, labor, and capital, — 
two of these are called primary because they are the original 
requisites of production. The first of these primary requi- 
sites is land ; the other is labor. The United States 



The Nature of Labor 121 

abounds in resources. To convert these resources into 
economic goods labor is required. Although the American 
Indian inhabited this continent for centuries, its r . 

7 Its im- 

vast resources were practically worthless because portance: 
the Indian was not naturally a laborer. Labor I* produc- 
es one of the foundation stones of production. 
Without labor, natural resources would be useless. Labor, 
therefore, bears the same relation to land that mortar does 
to bricks ; it brings natural resources together into a per- 
manent structure. 

Labor has changed the face of the earth and nowhere is 
this more noticeable than in the city. Indeed, the modern 
city is almost wholly the product of labor. In In the 
primitive societies, where men live by hunting ctty - 
and fishing, nature supplies nearly everything. Even in 
the country districts to-day the trees, the grass, the flowers, 
the rich soil, the springs, the waterways, the clear sky, and 
the clean air are nature's gift. But in the city, natural 
things have been altered. The trees, the flowers, and even 
the grass are artificially placed and protected by warning 
signs. Water can no longer be secured from a near-by 
spring. It has been pumped through an aqueduct to meet 
the city's needs. Even the sky and air are polluted by 
smoke and dust. 

In short, the man who comes to the modern city and 
looks at it analytically will discover that natural things 
are at a premium. Labor has shaped every- In ^ 
thing within sight. But evidences of labor do countr y- 
not appear in cities alone. The man plowing his ten-acre 
lot is laboring. The farmer's reaping machine, his house 
and barn, his macadamized road, his asparagus bed, his 
peach orchard, — all represent an outlay of labor. 



122 American Economic Life 

Again, modern industry is based on labor cooperation. 
The chair upon which you are sitting is the direct or indirect 
in modem result of the labor of thousands of men, women, 
industry. anc [ children. It was cut as standing timber in 
the woods of Michigan with axes and saws made in New 
England factories. It was hauled to a sawmill on bobsleds, 
the bolts of which were made in Philadelphia, while the 
steel runners were manufactured in Pittsburgh. It was 
sawed by a band saw which in turn was produced in a great 
factory employing several thousand men. Then, in the 
form of sawed lumber, this chair was shipped to a furniture 
mill over a railroad employing a hundred thousand men. 
When it reached the furniture factory, the lumber went 
through a great number of processes until it was converted 
into a chair ; and each tool in each process was manufac- 
tured in a different city in a different part of the country 
by a different set of employees. Finally, the finished chair 
was shipped on a great railway system to the city, 
where it was handled by a trucking company, delivered 
to the wholesale house, sold to the retail house, and 
eventually purchased by the present owner. In this pro- 
cess labor has evolved from the form of simple cooperation 
to that of division of labor and minute specialization in 
industry. 

In economics, when we speak of labor, we do not mean 
merely manual labor, but all effort either mental or physical 
Meaning of which * s expended in producing economic utilities, 
labor: That is, labor is industrial effort. The man 

Examples. W ^ Q wor k s ^j-^ a pj c k an( j s hovel is a laborer ; 

so is the woman who works with a needle ; so is the man 
who works with the pen ; so is the man who works with a 
brush ; so is the man who spends his time in directing the 



The Nature of Labor 123 

energies of others in order that they may assist in produc- 
tion. All of these persons are " laborers " in the economic 
sense because the laborer is one who expends physical or 
mental effort in the creation of economic utilities. 

But there is also a moral element in labor. While labor 
manifests itself in physical and mental activities, there is, 
nevertheless, a moral background to these activ- The mora i 
ities. For example, the honest laborer is a better element. 
and more efficient producer than the dishonest worker ; the 
temperate are more productive than the intemperate ; and 
the laborer of good moral standards is a more effective 
producer than one of loose morality. The adage " Hon- 
esty is the best policy " shows the economic value of a 
moral quality. 

Another important point to bear in mind is the fact 
that labor cannot always be measured by immediate re- 
sults. It is easy to see that the carpenter is a The final 
laborer because the result of his labor is visible tesL 
and tangible. But what about the labor of the policeman, 
of the clergyman, of the lawyer, of the teacher? Such 
labor may extend over months of effort and yet bear no 
tangible form. Shall we say, therefore, that their labor 
is unproductive? Not if it can be shown that such labor 
has, either directly or indirectly, aided in the creation of 
material wealth. The creation of economic utilities is the 
final test of labor and these may be arrived at indirectly 
as well as directly. If the policeman protects life and 
property, and thereby indirectly aids in the production 
of material wealth, his effort is industrial effort and he is a 
productive laborer. Likewise the teacher, by increasing 
indirectly the power of the student to produce material 
wealth, himself becomes a productive laborer. 



124 American Economic Life 

How Labor's Productivity May Increase. — Since labor 

in all its forms is an essential element in the production of 

wealth and in the maintenance of welfare, every 

Increase in . 

efficiency: effort should be directed toward increasing its 
Why im- productivity through the principles of conserva- 
tion and efficiency. Since the conservation 
principle demands that the things of the present be used 
wisely and handed on to the future in the best possible 
condition, it may be applied to labor in exactly the same 
way that it is applied to natural resources. If men and 
women are overworked, badly fed, poorly housed, their 
efficiency will be lowered and hence their ability to produce 
will be lessened. As the family standard is low, the stand- 
ard of their children will be low from birth. Thus the 
inefficiency and low standards of one generation will be 
reflected in decreased efficiency and lower standards in the 
next generation ; so that the evil conditions, which play 
so large a part in making men and women evil, will be 
perpetuated. Hence there arises the necessity of adopting 
some policy of conserving the labor force of the country 
and of increasing its efficiency. 

Both the welfare of the community and the efficiency 
of labor depend upon labor conservation. How, then, 
How may this conservation be effected? Chiefly in 

effected. two wavSj — either through negative or posi- 
tive measures. On the negative side, certain factors, like 
bad living conditions and insanitary or dangerous working 
conditions, must be corrected by purely repressive legis- 
lation. For example, laws are needed which will regulate 
the length of the working day ; which will insure abundance 
of air and sunlight in both houses and factories ; which 
will protect women and children against industrial risks 



The Nature of Labor 125 

and accidents. This, however, is only one side of the 
question. It is no less desirable that the positive factors 
in the problem be considered. Welfare and efficiency 
depend upon education. Men in ignorance of modern 
working methods cannot do good work ; and, since work 
to-day requires intelligence, it follows that the educated 
man will be the best worker. Furthermore, modern work, 
besides being arduous and monotonous, is wearing ; hence 
some form of recreation and relaxation must be provided 
in order that efficiency may be maintained. 

The productivity of labor may be advanced in the fore- 
going manner (1) by increasing the efficiency of each unit 
of labor, and (2) by increasing the total number Increase in 
of units of labor. That is to say, the labor force numbers: 
of a nation may have its productivity increased Natural 

. . . increase. 

either through improving its efficiency, or 
through increasing its numbers. The increase in numbers 
may be from within or from without. When the increase 
takes place within, it is a natural increase brought about 
by an excess of births over deaths. For example, if each 
family contains four children, population will double itself 
every generation, and the labor force of the nation will 
be likewise doubled. If this increase occurs every gener- 
ation, population will increase geometrically and the num- 
ber of laborers may far outstrip the means of supporting 
them. This was the well-known view of Malthus, who pro- 
pounded his theory in England at the close of the eighteenth 
century. 

Malthus thought that, because land yielded its returns 
in a smaller ratio than labor multiplied, man's future would 
be gloomy and dreary. He pictured population as out- 
stripping the means of subsistence. This situation did not 



126 American Economic Life 

come to pass, however, because man has delayed the oper- 
ation of the law of diminishing returns from land and, at 
the same time, has overcome the tendency of population 
to increase in geometrical ratio. Population has been 
checked by positive and negative means. On the positive 
side, wars, famines, and disease have kept population down ; 
while on the negative side late marriages, prudence, and 
restraint have lowered the birth rate. In fact, to-day, 
in many places conditions are just the reverse of what 
Mai thus pictured. 

The labor force of a country may also be increased by 
additions from without, that is, through immigration. 
Were it not for this method of increase, the labor 
immigra- force of the United States would not be nearly so 
large as it is. As the nineteenth century ad- 
vanced, the native white birth rate declined. This decline, 
however, was often forgotten in the tremendous increase 
in the sum total of our population brought about by the 
vast influx of European immigrants into this country. 
This immigration furnished America with an ever-increas- 
ing source of labor supply from the beginning of its history 
up to the second decade of the twentieth century, when 
the World War temporarily interrupted the rolling tide 
of immigration to this country. When the war was over, 
however, this tide again set in. 

Labor, then, is one of the primary productive elements. 
In importance it is co-equal with land or natural resources. 
The con- It includes every phase of human activity which 
elusion. directly or indirectly adds to the sum total of 
material wealth produced in the world. As a factor of 
production its power may be enhanced by reason of an im- 
provement in its quality or by an increase in its quantity. 



The Nature of Labor 127 

Only through wise means of conservation and proper 
methods of education will the efficiency or quality of labor 
be improved. On the other hand, the quantity of labor 
may be increased (1 ) through the natural increase of popu- 
lation brought about by a rising birth rate or a falling death 
rate, and (2) through the medium of immigration into the 
country of vast hordes of laborers. 

QUESTIONS FOR RECITATION 

1. To what extent is labor essential in production? 

2. Explain the relative importance of labor in the city and in 
the country. 

3. Describe the part played by labor in modern industry. 

4. Define labor. Give examples. 

5. What is the difference between the American Indian and the 
white man? What effect had this upon America? 

6. Explain the different elements in labor. 

7. What is the final test of whether man's effort is labor or not? 
Give examples. 

8. Tell why the effort of each of the following is or is not labor : 
a. The physician, b. The stock broker, c. The card gambler. 
d. The stock manipulator, e. The philanthropist. 

9. In what two ways may labor's productivity be increased? 

10. Why is efficiency in labor important? In what two ways 
may it be secured ? Explain each. 

11. Why is the number of laborers important? In what two 
ways may the number be increased ? 

12. Explain the natural increase of population.. What was the 
Malthusian law of increase ? Is it operating in America to-day ? 

13. Explain how the labor force of a country may be increased 
from without. 

PROBLEMS FOR DISCUSSION 

1. Discuss the relation between the amount of labor expended 
on an article and its selling price. 

2. Should labor be the sole element in determining the cost of 
an article ? Explain your position. 



128 American Economic Life 

3. Has labor become more or less important with the develop- 
ment of machinery ? Why ? 

4. Does the average street laborer work hard? Give your 
reason. 

5. Of the street laborers that you have observed, which race 
works hardest ? Prove your point. 

6. What environmental advantages have American laborers 
over laborers in Europe ? 

7. Which do you consider more important : conservation of 
human energy or conservation of natural resources ? Why ? 

8. What conclusions were drawn by the classical economists from 
their laws relating to land's increase and labor's increase ? 

9. What has interfered with the operation of these laws in the 
United States ? What is the result ? 

10. May a distinction be made between the original labor force 
of the country and the group of immigrants at present coming to 
the country ? Explain and give examples. 

11. Is all effort labor? Defend your answer. 

12. What is meant by "division of labor"; "specialization in 
industry" ; "territorial division of labor" ? 

SUPPLEMENTARY READING 

Carver, T. N. Principles of Political Economy, Chaps. VIII, IX, X. 

Clay, H. Economics, Chaps. II and III. 

Ely, R. T. Outlines of Economics, Chap. VIII. 

Gide, C. Principles of Political Economy, pp. 108-124. 

Mill, J. S. Principles of Political Economy, Book I, Chaps. I and 

II. 
Seager, H. R. Introduction to Economics, Chap. VII. 



CHAPTER XIV 

The Labor Force of the United States 

I. The early settlers 
i . Their origin : 

a. The New England colonists : 
(i) Their characteristics 

(2) Their similarity 

(3) Their occupations 

b. The Middle colonists : 

(1) Elements in the population 

(2) Their characteristics 

(3) Why they developed industry 

c. The Southern colonists : 

(1) Their characteristics 

(2) Why they developed agriculture 

(3) Why slavery flourished 
2. The conclusion 

II. The later elements 

1 . From Northwestern Europe : 

a. The Irish 

b. The Germans 

c. The Scandinavians 

2. From Southeastern Europe: 

a. The Italians 

b. The Slavs 

c. The Russian Jews 

d. Other groups 

3. The resulting problem 

The Early Settlers. — Since the American Indian has 
never become a consistent industrial worker, American 

129 



130 American Economic Life 

labor is wholly of foreign origin. From the beginning of 
the seventeenth century until the present time, America 
has been recruiting its labor force from various 
ngin * parts of the world. 

In the early New England colonies the Puritan element 
predominated. Stern ideas of living, an abhorrence of 
The New pleasure, and a strong sense of the holiness of 
England work characterized this group. The Puritans 
came largely from the cities of England, where 
they were artisans and tradespeople. Their religion gave 
them deep convictions and high moral standards, and they 
were persistent in their efforts to achieve any end upon 
which they bent their energies. They adapted themselves 
easily to the new surroundings, forming a strong and 
persistent type of man and woman well calculated to over- 
come the difficulties incident to the conquest of a wilder- 
ness. Because of their independence in religious and 
political matters, they developed into strong individualists. 

These early immigrants from England, together with 
those who came later from Scandinavia and north central 
Europe, made up a population whose home institutions 
and racial ideals were so nearly alike that there was little 
difficulty in welding them into a homogeneous group. 
Each new element which arrived from Europe was readily 
assimilated and formed an integral part of our early popu- 
lation. 

This New England • population very readily conquered 
the adverse conditions of northern geography and climate. 
They built ships because shipbuilding materials and har- 
bors were abundant. They traded with the West Indies 
because the fish which they caught all along the coast 
formed an exchangeable commodity when salted and trans- 



The Labor Force of the United States 131 

ported into the southern countries. They carried on 
manufacturing because the numerous rivers supplied much 
valuable water power. In short, the New England popu- 
lation measured up to the demands of the new surroundings 
and utilized them in a manner beneficial to the growing 
nation. 

While the people who came to New York, Pennsylvania, 
New Jersey, and Delaware were of a somewhat different 
group, the basic elements of this population were The Middle 
the same as those of the New England settlers. colonists - 
The Quakers of Pennsylvania, New Jersey, and Delaware 
came largely from England. They were joined by groups 
of Germans, Swedes, and Scotch-Irish, who settled on the 
land, developed the agricultural resources, and paid some 
attention to the establishment of manufacturing. In 
New York the Dutch were the first settlers, but they were 
later reenforced by groups of English and Germans. 

Therefore, it may be seen that the general characteristics 
of the New England settlers were distributed pretty freely 
throughout the Middle Atlantic colonists. The people of 
this group were solid, industrious, intelligent, and God-fear- 
ing. Many of the newcomers came to America because 
they believed in a political or religious principle, and were 
willing to make sacrifices for it. If to these qualities are 
added the perseverance and adaptability for which the 
New England colonists have also become justly famous, a 
reasonable picture of this middle group is presented. 

The people of the Middle colonies, like those of New 
England, developed industry rather than agriculture for 
two reasons — first, because their agricultural land was 
inferior in quality to that of the South ; and, secondly, 
because the opportunities for developing industry were so 



132 American Economic Life 

abundant. Not only could ships be built, but fishing could 
be carried on profitably. It was later discovered, too, 
that the deposits of iron ore could be worked, that hides 
could be manufactured, and that the textile industry was 
not only possible but lucrative. 

In the South, the character of the early settlers was 
somewhat different from that of the Northern colonists. 
The South- The Southern colonists came to America largely 
em colonists. f rom motives of gain. Here they expected to 
find gold and riches, and to recruit their falling fortunes. 
They also came to America to escape political and religious 
troubles, for many of them were royalists and members of 
the Established Church. They were an aristocratic and 
pleasure loving set, who desired to begin life anew on large 
and fertile plantations. Many representatives of the 
gentry and middle class were also among these early colo- 
nists. Since, however, hard physical labor had to be per- 
formed by some one, the upper classes imported to the new 
land many indentured servants and supported the traffic 
in slaves which had already been established. 

In the Southern colonies, agricultural land was abundant 
and fertile. Then, too, the climate was suited to the pro- 
duction of tobacco, rice, indigo, and cotton. While indus- 
trial resources were slightly developed, the South devoted 
a great portion of its energy to agriculture, because from 
that occupation the greatest gains could be secured. Then, 
too, the land in the North was divided into small holdings, 
while in the South the land was laid out in large plantations 
worked by the indentured servants and slaves. 

Slavery did not prevail in the North because there was 
no economic way in which the slave could be used. Slav- 
ery is desirable only when a large number of men can be 



The Labor Force of the United States 133 

worked together under the charge of an overseer. In 
industry this is not possible. But since it is possible in 
agriculture, large groups of slaves were used profitably 
throughout the South. Thus the labor force of the North 
was composed almost exclusively of people working for 
their own advancement, while that of the South consisted 
chiefly of three classes, — the landowners, the indentured 
servants, and the slaves. 

The early population of the United States was drawn 
almost exclusively from Africa and northwestern Europe. 
With the exception of the slaves, nearly all of The con . 
those who came to America were members of clusion - 
one of the Baltic stocks. They had all developed their 
ideas and ideals in the same general part of the world and 
along the same general lines. In the North these settlers 
were therefore easily assimilated and developed into one 
compact group. In the South, however, the presence of 
a body of people who could not assimilate with the whites 
made the development of a homogeneous group more 
difficult. 

The Later Elements. — The nineteenth century* was 
characterized by three phases of immigration. In the 
first place, the old immigration of the eighteenth 

. . b . . , . From north- 

Century was carried over into the early years of west 

the nineteenth century; secondly, there oc- Eur °P e: 

i • n » • r t • i ^ The Irish. 

curred a great influx into America of Irish, Ger- 
mans, and Scandinavians during the middle of the nine- 
teenth century ; and, thirdly, after 1880, a great change 
came over the racial character of the immigrants to this 
country. Just before the middle of the century, in 1847, 
occurred the great Irish famine brought about by the fail- 
ure of the potato crop. This resulted in the immigration 



134 American Economic Life 

of millions of Irish to America and in the partial depopu- 
lation of the Emerald Isle. As a consequence there are 
as many Irish in the United States to-day as in Ireland 
itself. These people have become well assimilated into 
our population and have risen, both numerically and na- 
tionally, to a position of considerable importance in our 
political life. From an economic standpoint, the Irish, 
though sometimes unsteady, are bright, cheery laborers of 
considerable intelligence and natural capacity. While 
at first they were largely confined to the group of unskilled 
workers, they later attained great success in higher posi- 
tions of an executive and professional character. 

About the same time that the Irish came to this country 
in large numbers, great migrations of Germans to America 
likewise took place. The year 1848 was sig- 
nalized by political revolutions throughout 
Europe and, in Germany, when they broke out, they were 
suppressed with great severity. This resulted in the exodus 
from Germany of vast numbers of people who sought po- 
litical freedom in the New World. As the century wore on, 
this •tide of immigration became so vast that over five 
millions of Germans came to this country. Because of 
their difference in language, these people were sometimes 
not so easily assimilated into our population as were the 
Irish and the English. In fact, during the World War, 
it was feared for a time that this group might place alle- 
giance to their native country above that which they owed 
to their adopted land. But, happily, events disproved 
this position so far as the great body of Germans was 
concerned. 

Scandinavians from Norway, Sweden, and Denmark 
also came to America in large numbers so that to-day there 



The Labor Force of the United States 135 

are over a million of these elements in our population. 
The Germans have settled not only in large cities where 
they have become tradesmen and artisans, but scandi- 
also in agricultural communities in Pennsylvania navi ^s. 
and the Middle West. Similarly, the Scandinavians have 
settled in agricultural districts in the great Northwest, 
where they have engaged not only in farming, but also in 
the lumbering and transportation industries. From an 
economic standpoint, both the Germans and Scandinavians 
are steady, intelligent, careful, provident, and adaptable 
workers who have often risen from positions of minor im- 
portance to places of great power and influence in American 
life. 

Since 1880 the source of immigration to this country 
has been gradually shifting from northwestern Europe to 
southeastern Europe. Besides the European From 
shift, bringing Mediterranean peoples to our southeast 
land, a number of French Canadians have also The 
come into New England. While, therefore, the Italians - 
Baltic countries of Europe furnished the early labor force 
of America, the south central and southeastern European 
countries are responsible for most of those migrating to 
this country since the closing decades of the nineteenth 
century. Foremost among these groups are Italians, 
Slavs, Russian Jews, Hungarians, and Eastern peoples. 
The Italians migrate to this country chiefly for economic 
reasons. So hard has the soil of their native country been 
worked, that Italians look with longing eyes to America, 
the land of opportunity and riches. Here they settle 
largely in the North and Middle Atlantic states, showing 
a frequent tendency to group themselves in the congested 
districts of large cities. They also settle in agricultural 



136 American Economic Life 

communities and become small producers of fruits and 
vegetables. They are frugal and industrious workers, 
but are often handicapped by their ignorance of the English 
language. They vary also in disposition, according to 
their southern or northern racial characteristics. 

The Slavs from the old empire of Austria-Hungary con- 
stitute another new element in our population. These 
people are of various racial stocks and are difh- 

Slavs, Jews, r * 

and other cult to assimilate because of language as well 
as racial differences. Because of their illiteracy 
they are chiefly unskilled laborers, working in the mines 
of Pennsylvania and in other industrial regions. The 
Russian Jews are naturally intelligent and show a re- 
markable ability for advancement. They settle largely 
in cities, where they engage in commerce and the trades, 
which they prefer to agriculture and manual labor. Their 
family life is strong, while their racial characteristics are 
highly developed. The Hungarians, like the Slavs, settle 
in mining districts, or in their own little groups where they 
maintain many of their national characteristics. Finally, 
from the East come Greeks, Turks, Armenians, and Syrians, 
each of whom adds his quota to the development of our 
labor population. 

It may thus be readily seen that, as contrasted with our 
early population, a vital change has come over the character 
The of the people migrating to America. Such a 

resulting change is fraught with great possibilities for 
good or for evil. Millions of American wage- 
earners were born abroad in lands whose economic and 
political ideals are far removed from our own, and millions 
more were born in this country of foreign parentage. . Thus, 
a large portion of our labor force is made up, not of native 



The Labor Force of the United States 137 

Americans, but of foreigners or the children of foreigners. 
If we are to maintain the efficiency of labor, the problem 
which we are now confronting is to instill into this labor 
population the capacity for work, the power of application, 
the intelligence, the energy, the perseverance, and the 
.adaptability in developing natural resources which charac- 
N terized the early settlers. 

QUESTIONS FOR RECITATION 

1. Why is the labor force of the United States wholly of foreign 
origin ? 

2. Were the early American settlers immigrants? Explain 
your answer. 

3. Contrast the original labor force of New England with that 
of the South in regard to : 

a. Their industrial characteristics. 

b. Their occupations. 

c. Their moral ideas. 

4. Describe the characteristics and occupations of the settlers 
of the Middle colonies. 

5. Did the Middle group more nearly resemble the Northern or 
Southern group ? Why ? 

6. Summarize the condition of the labor force of the United 
States as it existed at the beginning of the nineteenth century. 

7. Contrast that labor situation with the conditions existing at 
the opening of the twentieth century. What factors were respon- 
sible for the change ? 

8. What elements came into our labor population towards the 
middle of the nineteenth century? Describe each group. 

9. What has been the prevailing character of immigration to this 
country since 1880? 

10. Describe the character of each of the later labor groups mi- 
grating to America. 

11. What great problem has the change in later immigration given 
rise to ? Explain fully. 



138 American Economic Life 

PROBLEMS FOR DISCUSSION 

1. Show how nature and man — land and labor — harmonized 
in the development of North and South in colonial days. 

2. Discuss the salient characteristics of the early labor force 
of this country. 

3. Has the Anglo-Saxon race any peculiar economic character- 
istics ? Explain your answer. 

4. Upon what grounds do Anglo-Saxons base their claim to 
political leadership ? 

5. Explain the great fluctuations of the movement of immi- 
grants to the United States since 1820. 

6. What change in the prevailing character of our immigrants 
has occurred within the last generation? 

7. Will this recent immigration be of ultimate economic ad- 
vantage to the United States? Why? 

8. What traits do these immigrants possess that are not pos- 
sessed by native Americans ? 

9. What steps should the United States take to Americanize 
immigrants ? 

10. Show how the law of the increase of population has been 
affected by immigration. 

SUPPLEMENTARY READING 

Commons, J. R. Races and Immigrants in America. 

Fair child, H. P. Immigration. 

Hall, P. F. Immigration. 

Reports United States Immigration Commission. 

Riis, J. A. Making of an American. 

Ross, E. A. The Old World in the New. 

Steiner, E. A. On the Trail of the Immigrant. 

Steiner, E. A. The Immigrant Tide. 



CHAPTER XV 

Economic Aspects of Immigration 

I. Causes of immigration 
i . The object in view 

2 . Military and industrial reasons : 

a. The European need 

b. The American need 

3. Political and religious aspect : 

a. The early cause of immigration 

b. How it reappears to-day 

II. Effects of immigration 

1 . From a social standpoint : 

a. The groups of immigrants 

b. The character of the immigrants : 

(1) Difference between North and South Eu- 
ropean peoples 

(2) Why Northern races are preferable 

(3) A possible danger 

(4) What the new elements may bring 

2. From an economic standpoint: 

a. The labor affected 

b. Effect of immigrant's standard 

c. Findings of the commission 

d. The restrictions imposed 

e. The conclusion 

Causes of Immigration. — The peaceful migration of 
great numbers of people from one nation to another is a 
modern phase of an old problem. In ancient object in 
times, if a land flowed with milk and honey, view - 
kings led their armies against it, enslaved or drove out the 

139 



140 American Economic Life 

inhabitants, and took possession of the fields and cattle. 
Under such circumstances, the movement of a few thou- 
sand men from one state to another constituted a menace 
to social welfare. But, in modern times, millions of per- 
sons move from one nation to another without attracting 
more than passing notice. This movement, instead of 
being warlike, may take the form of a peaceful conquest 
of natural resources. However, it must also be remem- 
bered that " land " plays such a mighty part in national 
development as to cause nations, in our own day, to make 
relentless war upon each other for its possession and utili- 
zation. 

The governments of the Old World, in order to insure the 

permanence of a large emergency army, wish to keep at 

home as many of their subjects as possible. 

an d This necessity of military service has been one 

industrial f fae great causes of emigration from Europe. 

reasons. . . 

On the other hand, in America we do not usually 
emphasize an increase in our military forces, but we do 
look continually for an increase in our industrial army. 
It is upon industrial recruits that we depend, just as Euro- 
pean countries depend upon military organization. The 
immigration of a group of strong, intelligent men and wo- 
men, therefore, makes a welcome addition to the ranks of 
American labor. 

Religious and political persecution furnish another motive 
for emigration. The best elements among the early colo- 
nists left the Old World because they could not 
an d secure there a reasonable toleration of their 

religious political or religious views. They were pro- 
gressive thinkers, — men who had such great 
faith in their convictions that they were willing to leave 



Economic Aspects of Immigration 141 

their mother country and make a new home in a new world. 
A study of recent immigration shows that some people, 
notably the Jews, are still coming to America for the same 
reasons. 

Effects of Immigration. — In order to understand clearly 
the effects of immigration upon our institutions, we must 
know first the character of the immigrants who From a 
have come to America. The three groups of social stand- 

r point: 

European races, — the Baltic or Northwestern Groups of 
races; the Alpine or Central European races; immigrants. 
and the Mediterranean or Southern races, — differ con- 
siderably in their so ial and economic characteristics. 
From the Baltic races have come the Scandinavians, the 
Germans, the English, and allied groups ; from the Central 
European races, the Slavs, Russian Jews, Austrians, and 
Hungarians ; while from the Mediterranean countries have 
come the Italians, the Greeks, and the Syrians. 

With the change in the source of immigration from the 
northwest to the southeast of Europe there has been a 
corresponding change in the character of the character of 
immigrants themselves. The early Baltic immi- immigrants. 
grants were more highly educated, more easily adaptable 
to new surroundings, and, in addition to these two valuable 
characteristics, furnished a large number of skilled artisans 
and mechanics. In contrast with these, the later Alpine 
and Mediterranean immigrants show a high percentage of 
illiteracy and are prepared to do little except unskilled work. 

Whether one of these racial groups is inherently more 
efficient than another we are not prepared to decide. It 
is apparent, however, that the immigrants of northern 
Europe are more highly educated and better adapted to 
our standards than the immigrants of southern Europe. 



142 American Economic Life 

The north Europeans are more in sympathy with our 
political and industrial methods because their institutions 
approximate more closely to ours than do the institutions 
of southern Europe. 

The presence of a large group of unassimilated immi- 
grants, whose ideals and habits of thought are far removed 
from ours, presents to America the possibility of grave 
danger in the development of national character. This 
difference in attitude is not only political, but also economic 
and social, extending to central as well as to south European 
races. The World War disclosed, for a time, the menace 
of divided political allegiance brought about by difference 
in national ideals. Old World political traditions are out 
of harmony with American ideals, and the United States 
does not need the importation of any political or economic 
panacea sprung from the soil of oppressed Europe. Fur- 
thermore, the illiteracy, the poverty, and the low economic 
standards of southeastern Europe must not be reproduced 
in America. Hence, there arises in this country the neces- 
sity for a complete and thoroughgoing process of Americani- 
zation of foreign immigrants that must be conducted 
through the schools, the churches, the press, the public 
forum, and the government itself. 

On the other hand, it is questionable whether the later 
groups of immigrants are not at times bringing to this 
country something which it really needs. For example, 
the Polish race is essentially musical and its aesthetic stand- 
ards are very high ; the Jews are highly intellectual ; and 
the Italians are bringing to America artistic ability of a 
high order. If these various qualities, which have been 
more highly developed in some countries than in others, 
can be combined with the industrial efficiency of the Amer- 



Economic Aspects of Immigration 143 

ican, the result may be a race of people more advanced 
than the world has ever known. 

Apart from the racial contribution which the central 
and south European immigrant makes to this country, 
what is his effect upon the wage-working part From an 
of our population? Disregarding the children g^nd^nt: 
of the immigrant, who enjoy the benefit of the The labor 
public school system, and considering only the a -ff ected 
untutored immigrant himself, it is clear that the mass of 
immigrants from southeastern Europe can have little or 
no economic effect except upon semi-skilled and unskilled 
labor. This is true because such immigrant labor is dis- 
tinctly different from that of northwestern Europe. It is 
usually unskilled in technical knowledge, handicapped by 
lack of education, and often capable of performing only 
the hardest kind of physical tasks. 

The Russian, Hungarian, or Italian immigrant has come 
from a country where the standard of living of the working 
population is low. To him, windows and E jj ecto f 
doors are often luxuries. In some places in immigrant's 

. in* • standard. 

Russia even a wooden floor is considered a 
luxury. Consequently, to many of the immigrants, the 
tenement house of our great cities is a desirable home. 
The immigrant will work for a low wage because he is 
accustomed to poor food and a small amount of clothing. 
The presence of large numbers of immigrants in any com- 
munity will therefore result in a temporary lowering of the 
wage standard. In many localities this has often happened. 
As a result, it is rare in those localities to find American- 
born persons working as common laborers, because, accus- 
tomed to a high standard of living, they are unable to exist 
on the wage which the immigrant will accept. 



144 American Economic Life 

The Immigration Commission, appointed before the pas- 
sage of the present immigration law, made its report to 
„. ,. , Congress after an extended inquiry into the 

Findings 0/ 

the Com- various sources, character, and effects of immi- 
gration during the early part of the twentieth 
century. It concluded that the immigration of that time 
was detrimental to the best interests of the United States. 
Modern immigration, the Commission held, tends to lower 
social and industrial standards. The immigrant, a low- 
standard man in the country from which he comes, fails 
to grasp the significance of the higher American standards. 
He is willing to live in more congested quarters, to accept 
a lower standard of diet, and to work for less wages. The 
American, accustomed to higher standards, is unwilling 
to come down to the lower level. In the competition which 
follows he is inevitably beaten, because he must either 
lose his position or accept the standard set by the immi- 
grant. 

Accordingly, Congress set itself to the task of imposing 

new restrictions upon immigration. As far back as 1882 

it had already passed a Chinese Exclusion Act. 

There- f r , . . 

striaions This was made necessary because of the peculiar 
imposed. rac i a l 3 social, and economic characteristics of the 
Chinese laborers, who completely crowded out American 
labor in whatever competitive occupations they engaged. 
So low was their standard of living that no American could 
subsist upon it. Later, during President Roosevelt's 
administration, an understanding was arrived at with the 
Japanese government whereby Japanese immigration to 
this country was successfully restricted. Then, too, Con- 
gress, through its immigration laws, had already excluded 
various classes of undesirable immigrants, such as anar- 



Economic Aspects of Immigration 145 

chists, criminals, paupers, certain mental, moral, and 
physical defectives, and contract laborers. Finally, in 
order to satisfy the labor unions, Congress, over President 
Wilson's veto, passed an act imposing the literacy test on 
all immigrants. According to this act, all those who are 
unable to read or write are excluded from our shores. How- 
ever, since there is a real need in America for a group of 
laborers who will perform the hard unskilled work to which 
the native American is. averse, it is doubtful whether this 
test is the best that might be devised. It measures neither 
native ability nor biological fitness. 

Whatever may be the ultimate effect of immigration, 
its present influence is clear. In the future the immigrant, 
or at least his American-taught children, will The 
doubtless demand higher standards of life and c °™ l ™ion. 
work ; but when, in normal times, hundreds of thousands 
or even a million annually leave the poorer districts of 
Europe and bring their low standards of life to the United 
States, the American laborer is confronted by a competition 
which will ultimately lower his standards and compel him 
to seek work elsewhere. It is evident, therefore, that 
from the standpoint of American labor, foreign immigration 
must be so restricted and regulated that the present stand- 
ard of living of the native American may be maintained. 



QUESTIONS FOR RECITATION 

1. Explain two different methods of conquest of natural re- 
sources. 

2. Describe the European impetus for emigration. 

3. Why does the United States attract the immigrant? 

4. What were the causes of the early immigration to America? 
Of the later immigration ? 



146 American Economic Life 

5. Divide European peoples into groups : (a) according to terri- 
tory, (b) according to races. 

6. Show clearly the differences among these groups. 

7. Which group is more nearly like our early American stock? 
Why ? What is the consequence of this ? 

8. What groups are most different from us? State the reasons 
and the consequences. 

9. What good may result from this admixture of races in America ? 
Explain fully. 

10. What great danger might result? Give examples. 

11. Outline a program for the complete Americanization of 
immigrants. 

12. Explain clearly the chief economic effects of immigration upon 
American labor. 

13. What has been done to protect American labor? Are these 
restrictions sufficient? 

14. Contrast the American's and the Russian's standard of 
living. 

15. Why are special restrictions imposed upon immigration from 
the Orient ? 

PROBLEMS FOR DISCUSSION 

1. Point out the social and economic effects of immigration in 
the United States. 

2. Would the American labor force be more efficient without the 
immigrant ? Why ? 

3. How would heavy unskilled tasks be performed if the immi- . 
grant were excluded ? 

4. Account for the low standard on which the immigrant is will- 
ing to live. 

5. Will Greeks, Italians, and Poles make good American citi- 
zens ? 

6. What is the underlying reason for permitting immigration 
into the United States ? Is it justifiable ? Explain. 

7. Name the more important motives by which persons are 
(a) induced to leave the country of their birth, (b) attracted to 
other countries. 



Economic Aspects of Immigration 147 

8. It is argued that cheap immigrant labor is like machinery — 
an added aid in production which relieves the native laboring class 
from heavy and disagreeable toil. Is the analogy true ? 

9. Is the manufacturer's argument for cheap immigrants valid 
from the point of view of society in general ? Explain. 

10. Should immigration be restricted? If restrictions are im- 
posed, should they limit the number of immigrants, or fix a test of 
the quality of immigrants, or both ? Why ? 

n. Would restriction of immigration be justified if the conges- 
tion of immigrants in cities and along the seaboard could be pre- 
vented, and the foreign elements distributed over the whole coun- 
try ? Explain. 

12. State the arguments for and against immigration. 

SUPPLEMENTARY READING 

Antin, Mary. The Promised Land. 
Brandenburg, B. Imported Americans. 
Coolidge, M. R. Chinese Immigration. 
Hourwich, I. A. Immigration and Labor. 
Kawakami, K. K. Asia at the Door. 
Steiner, E. A. From Alien to Citizen. 
Warne, F. J. The Immigrant Invasion. 
Zangwill, I. The Melting Pot. 



CHAPTER XVI 
The Risks or Labor 

I. Industrial accidents 
i . Kinds of accidents : 

a. Railroad accidents : 
(i) The causes 

(2) The remedy 

b. Mining accidents : 

(1) The situation abroad 

(2) The remedy 

c. Other accidents 

2. Total annual number 

3. The labor affected 

4. Effects of accidents 

II. Dangerous trades 

1. Chief source of danger 

2 . Danger from coal dust : 

a. Character of the lungs 

b. Effect on the lungs 

c. How preventable 

3 . Danger from lead poisoning : 

a. Its effects 

b. How preventable 

4. Other dangerous trades 

5. Recent progress 

The risks to which labor is subjected in modern industry 
may be grouped under two heads ; first, those involved in 
industrial accidents, and secondly, those arising from dan- 
gerous trades and occupations. 

148 



The Risks of Labor 149 

Industrial Accidents. — Industrial accidents include those 
catastrophes which either temporarily or permanently 
destroy the efficiency of the wage-earner. They 
may be classified according to occupation ; as s ° : 
railroad, mining, factory, and building accidents. Of 
these, the first two constitute by far the greater number. 

The material regarding railroad accidents is compiled 
by the Interstate Commerce Commission and is furnished 
by the railroads as part of their reports to Railroad 
the Commission. No other American accident accidents - 
statistics are collected with such careful accuracy. A 
study of these statistics for the present century shows a 
steady increase in the number of such accidents. In one 
year alone 10,000 persons were killed and 100,000 injured 
in railway accidents (1907). Railroad casualties are not 
only appalling in number, but increasing in frequency. 
That there is no justification whatsoever for this increase 
is proved by conditions in foreign countries, where the 
infrequency of railroad accidents is in marked contrast 
to our own waste of human life. The causes of this waste 
of life through railroad accidents are found both in indi- 
vidual action and in corporate management. So long as 
individuals are careless, accidents will occur; and so long 
as corporations fail to supply devices for the safety of their 
employees and passengers, the same result will follow. 

A remarkable proof of the fact that working conditions 
are largely responsible for these accidents is furnished by 
the beneficial effect of the federal law requiring automatic 
couplers. The passage of this act was followed by a reduc- 
tion in the number of coupling accidents from forty-four 
per cent of the total number of casualties among trainmen 
to nine per cent; although, at the same time, the total 



150 American Economic Life 

number of all railroad casualties was steadily increasing. 
Equally effective results would doubtless be secured by 
other forms of federal regulation concerning the length of 
runs, the character of signals, and similar protective meas- 
ures. Railway accidents are enormous in number; but, 
by wise precaution and stringent legislation, they can be 
largely eliminated. 

Accidents in coal mines are the most common of the min- 
ing accidents. The record of coal mine accidents in the 
Mining United States is unsatisfactory because it con- 
accidents. s i sts mere iy f a collection of the reports of state 
mine inspectors whose work is not so careful as that of 
federal officials. However, it was shown that in a single 
year (1908) 2500 miners were killed and 6500 injured. 
From a comprehensive study of all the statistics available, 
it is fair to conclude that there has been a steady increase 
from year to year, not only in the actual, but also in the 
proportional, number of men killed in mining accidents. 
This increase cannot be accounted for merely by the growth 
of the mining industry. A recent bulletin on coal mine 
accidents dealing with conditions abroad before the World 
War proves this conclusively. It states : " In all the 
European coal-producing countries the output of coal has 
increased greatly during the last ten years, but the number 
of deaths per one thousand miners, instead of increasing 
as in this country, has undergone a marked and decided 
decrease. This decrease has been due to the effect of min- 
ing legislation in those countries for the safeguarding and 
protection of the lives of the workmen, and has been made 
possible by government action in establishing testing sta- 
tions for the study of problems relative to safety in mining, 
including the use of explosives." 



The Risks of Labor 151 

The success of foreign governments in preventing mining 
accidents has been due primarily to their rules concerning 
the use of safety lamps and to their regulation of the charac- 
ter and use of mine explosives. Nothing could be more 
elementary or simple, and yet the United States has made 
but little effort to meet the problem in this way. It should 
be remembered, however, that the problem here, by reason 
of the dual character of our governmental system, is more 
complicated than the situation abroad. 

Turning now to accidents in manufacturing, we find that, 
because of lack of uniformity in the work of state factory 
inspectors, it is impossible to determine accu- other 
rately the total number of such accidents. How- accidents - 
ever, the best statistics of factory accidents have been 
compiled from the reports of the New York Bureau of 
Labor Statistics. If we take rive typical years at the 
opening of the present century, we find that, in that state, 
39,244 such accidents were reported. Of this number, 
864 were fatal ; 6580 involved permanent disability ; and 
32,722, temporary disability. The accidents in building 
trades have never been recorded except in fragmentary 
form. It is therefore impossible to state anything definite 
regarding them. The only accurate information that 
can be secured comes from the unions which pay benefits. 
The accident features of these - unions furnish material 
from which may be made an estimate of the number of 
union men killed and injured in each trade. 

It is clear, however, from a study of all the available 
sources of information, that the total loss to the Total 
community, caused by accidents of one kind or annual 
another, is enormous. An estimate of this loss 
places the total number of men, women, and children 



152 American Economic Life 

killed and injured each year through industrial accidents 
at five hundred thousand. This figure is as nearly accurate 
as possible, for it has been arrived at by five different 
methods of computation. 

It is not true, as it is currently supposed, that these 
accidents happen only to the careless, unskilled laborer, 
The labor the immigrant, and the American of low stand- 
affected. arc [ Nqj- on iy j s foe semi-skilled trainman a 
victim of the railroad accident, but also the conductor and 
the skilled engineer. A Pittsburgh investigation shows that 
of 440 men killed only forty per cent were lowest grade 
workmen. Thus the social cost of accidents is intensified 
by the fact that efficient as well as inefficient workmen are 
victimized. 

The burden of accidents falls on the family and on the 
community. The accident destroys the worker. The 
Effects of worker is the mainstay of the family, which is 
accidents. itself the basis of the community. Although 
children and old people may escape industrial accidents, 
the breadwinners upon whom they depend for subsistence 
are struck down at the rate of a half million every year. 
Industrial accidents, therefore, constitute one of the causes 
of industrial inefficiency. Of the half million persons 
annually killed and injured, the majority are wage-earners 
with families depending upon them. Their death or 
injury, therefore, affects the efficiency of the coming 
generation. 

Dangerous Trades. — Another danger to which labor 
is subjected results from the nature of the occupation. 
While, fortunately, not numerous, certain trades do exist 
where the death rate is several times higher than the death 
rate in the community at large. When a workingman 



The Risks of Labor 153 

enters such a trade and accepts such work, he takes his own 
life in his hands. 

The chief source of danger in these occupations arises 
from the presence of dust, which, entering the system 
through the lungs or alimentary canal, proves chief source 
injurious to the worker. Dust may also irri- of danger, 
tate the skin, but its effects here, except in the cases of 
antimony smelters and arsenic grinders, are usually not 
serious. In cases where dust enters the alimentary canal, 
stomach and intestinal troubles result; when it enters 
the lungs, tuberculosis develops. 

Thomas Oliver, in his Dangerous Trades, says, " Were 
it not for dust, fumes, or gas, there would be little or no 
disease due to occupation, except such as might Dangerfrom 
be caused by infection, the breathing of air coaidust: 
poisoned by the emanations of fellow-workmen, and ex- 
posure to cold after working in overheated rooms." Dust, 
then, is the most prevalent source of danger ; and its most 
injurious effect is on the lungs. 

The normal lung is a light, spongy mass, interwoven 
with minute bronchial tubes. Nature planned to exclude 
foreign substances from these tubes by placing character of 
hair in the nose and by guarding the whole pas- the lun ^ s - 
sageway with the vocal cords and the cartilage plates. 
These devices prevent any ordinary amount of dust from 
reaching the lungs. But, in coal mines, there is more 
than an ordinary amount. A visitor, long after leaving 
a breaker in which coal is cleaned dry, will continue to 
expectorate dust or coal particles which have been arrested 
in the larger passages. A long exposure to dust, however, 
dulls the sensibility of the membranes ; efforts are no 
longer made to expectorate the dust, and the particles 



154 American Economic Life 

enter the small tubes of the lungs and become embedded 
in the lung tissue. 

Again, Thomas Oliver says, "In a coal miner's lung 
there can be observed small masses of cells, deeply laden 
Effect on with carbon particles surrounded by a hardened 
the lungs. zone f altered lung, numerous black streaks 
underneath the pleura or covering of the lungs, inklike 
dots in the walls of the small bronchi, and enlargement 
with pigmentation of the bronchial glands." The entrance 
of dust into the lung finally converts it into " a hard and 
almost solid organ, incapable of carrying on the work of 
respiration." 

A similar effect is produced by other forms of dust. 
Examinations show particles of grit embodied in the tissue 
How pre- corresponding exactly to the dust grit of the 
ventabh. trade in which the victim worked. Therefore, 
the man who goes to work in a dusty trade prepares his 
lungs for a cordial reception to tuberculosis, or any other 
bacteria which attack weakened lung tissue. However, 
much can be done in the way of precaution and prevention. 
By screening the coal wet, the dust in the coal breaker may 
be reduced; and, by the use of suction wheels, blowers, 
and other mechanical devices, the dust in the factories 
may be rendered less dangerous. 

There are other occupations besides mining that are full 
of risk and danger. Certain substances used in industry 
are always injurious to life and health. Among 
lead these substances none is more widely used, nor 

poisoning: more rea jiy dangerous, than lead in its various 
forms. Lead poisoning occurs in several trades, 
although it is most severely felt in the manufacture of 
white lead. Poisoning from lead may be acute or chronic. 



The Risks of Labor 155 

The symptoms of both forms are colic, " wrist drop," loose 
teeth, and blue lines on the gums. 

Ventilation, an abundance of nutritious food, abstinence 
from all excess, especially alcoholic, the use of special hel- 
mets, together with short hours in the factory, ^ ow Pre . 
all assist in decreasing the dangers from lead ventable - 
poisoning. There is no other industry in which the dan- 
gers are more acute, and where the necessity for precaution 
and preventive measures should be more emphasized. 

The production of phosphorus, mercury, and arsenic; 
the chemical trades; rag sorting; wool sorting; work in 
compressed air chambers, — all involve dangers 
of varying degree. The reference to mining and dangerous 
the lead industry will, however, suffice to indicate 
the character of dangerous trades, their effects, and the 
possibility of remedying them through wise preventive 
measures. 

The recent progress made by the United States in the 
direction of social legislation is attested by the act of Con- 
gress which, in 1913, prohibited the use of poi- Recent 
sonous phosphorus in the manufacture of progress- 
matches. The awakening of the public conscience was so 
general that, within three years, twenty-three states 
passed accident insurance laws or workmen's compensation 
acts. The act of Congress prohibiting the use of poisonous 
phosphorus in the manufacture of matches resulted in 
fifteen states adopting the bill of the American Association 
for Labor Legislation for protecting workers from several 
occupational diseases, and from lead poisoning in particular. 
Foremost among the general measures designed to relieve 
the distress caused by industrial accidents and dangerous 
trades is the Workmen's Compensation Act. This measure 



156 American Economic Life 

is intended to furnish the injured worker automatically with 
the compensation specified in the act, and thus relieve him 
of the necessity of legal procedure with all the costs included 
in such action. Likewise, accident insurance and old age 
pension acts are coming to play an important part in our 
solution of this problem. In 1908 Congress enacted a 
law providing a system of compensation for accidents 
suffered by industrial employees of the Federal government. 
The example set by the national government was followed 
by the state governments, so that by 1914 a majority of 
the state legislatures" had enacted laws providing compensa- 
tion for industrial accidents. 

QUESTIONS FOR RECITATION 

1. Define industrial accidents ; dangerous trades. 

2. Classify the chief industrial accidents in the order of their 
importance. 

3. Which group is best studied? Why? Why cannot the 
other groups be so effectively investigated? 

4. Discuss the causes and remedies of railroad accidents. 

5. Compare mining accidents at home and abroad. How may 
they be lessened ? 

6. Give an estimate of the total annual number of accidents in the 
United States. 

7. Who suffer most from accidents ? 

8. Name the chief dangerous trades and tell why each is dan- 
gerous. 

9. Why is dust so dangerous? 

10. In regard to mining : 

a. Explain its dangerous consequences. 

b. Discuss the remedies. 

11. Discuss lead poisoning : 

a. How it affects the system. 

b. How it may be obviated. 

12. Name some other dangerous trades. 



The Risks of Labor 157 

13. Why has the United States abolished the use of poisonous 
phosphorus in match making ? 

14. Describe the recent progress made in social legislation in the 
United States. 

PROBLEMS FOR DISCUSSION 

1 . Are industrial accidents inevitable ? 

2. In a case where persons are killed and injured, in a wreck due 
primarily to a defective air brake, what should be the legal remedy? 

3. To what extent is the community at large responsible for 
accidents ? 

4. Where does the ultimate burden of industrial accidents rest ? 
Explain. 

5. Should a manufacturer be held personally responsible for an 
accident due to unguarded machinery ? 

6. What would be the most effective method of preventing 
accidents ? 

7. Discuss workmen's compensation acts as remedies. 

8. Analyze the street accidents of your city, and develop a means 
of prevention. 

9. Discuss the dangerous trades in your community. 
10. Why is lead poisoning particularly disastrous? 

n. What remedies exist for the dangers involved in dangerous 
trades ? 

12. Are consumers justified in using the products of such trades? 
State reasons. 

SUPPLEMENTARY READING 

Adams, T. S., and Sumner, H. L. Labor Problems. 

Bulletins of United States Bureau of Labor Statistics, Nos. 101- 

109, 126, and 155. 
Kelley, F. Some Ethical Gains through Legislation. 
Oliver, T. Dangerous Trades. 
Oliver, T. Diseases of Occupation. 
Reports of State Bureaus of Labor Statistics. 
Rubinow, I. M. Social Insurance. 
Seager, H. R. Social Insurance, Chaps. II-III. 



CHAPTER XVII 

Problems op Industry 

I. Child labor 

i . Its English origin 

2. Its extent in America 

3. Its evil effects: 

a. On the child : 

(1) Physically 

(2) Mentally 

(3) Morally 

b. On family life 

c. On society 

d. On the product 

4. Its regulation 

II. Women in industry 

1 . The causes : 

a. Minute subdivision of labor 

b. Acceptance of lower wages 

c. Loss of home employment 

2. Arguments against 

3. Arguments in favor of 

4. Regulation of the problem 

III. Unemployment 

1 . Causes 1 

a. Personal causes 

b. Industrial causes 

2. Effects: 

a. On the unemployed 

b. On the family 

3. The remedy 

158 



Problems of Industry 159 

Of the problems arising from modern industry, three 
are of recurring interest. These are the problems of child 
labor, women in industry, and unemployment. 

Child Labor. — The problem of child labor had its real 
origin in England in the last half of the eighteenth century 
when the factory system was first being de- its English 
veloped. Manufacturers were in great need of on s m - 
unskilled labor to operate the new machinery, while poor- 
houses and orphan asylums were overcrowded with just 
this kind of labor. As a result, these institutions gave 
up their children to the manufacturers, who in certain 
cases even agreed to take one insane child with every 
twenty healthy ones. The children were quartered in 
barracks and worked in day and night shifts, the day 
shifts sleeping in the beds left vacant by the night workers. 
No provision was made for sanitation, and the children 
were fed on the worst kind of food. These conditions, 
culminating in an outbreak of disease and epidemics, 
resulted at the opening of the nineteenth century in the 
passage of an act for the regulation of the health and morals 
of apprentices. Then, in 1833, and later in 1847, much 
more comprehensive and effective laws regulating the labor 
of women and children in industry were passed. In 
our own day the English government has completed its 
supervision over industry and has passed much important 
social legislation. 

Child labor in the United States is thus a recurrence of 
an Old World phenomenon. At first, it appeared in New 
England, where industry was early developed, it s extent 
but since the close of the Civil War, the South in America, 
has entered upon an era of industrial development, and 
thus the old problem of child labor reappears there to-day. 



160 American Economic Life 

Again, in the industrial sections of the Middle West, and 
in the great agricultural West, thousands of children under 
fourteen years of age are engaged in industrial and agri- 
cultural work. A few years ago it was estimated that 
of the two million children employed in gainful occupa- 
tions, three-fifths of them were engaged in agriculture, one- 
sixth in manufacturing, one-sixth in domestic work, and 
the remainder in commercial and professional service. The 
largest number of children are, therefore, employed in 
agriculture; but child labor is usually associated with 
manufacturing, for it is here that its worst evils are mani- 
fested. 

There is no doubt about the evil consequences of em- 
ploying children in industry. From whatever stand- 
Effects: point the problem is regarded, child labor is in- 
On'the jurious. It is harmful to the child, to family 

child. yHq } to society, and to the industrial product. 

On the physical side, hard labor is injurious to young chil- 
dren because their bodies are still developing. Through 
activity the body of the growing child is developed most 
surely and most completely. The originalities of a child 
arise through action, struggle, and the trial of things for 
himself. But the child of twelve or fourteen who stands 
at the machine tying threads for eleven hours a day is 
not growing through expression. He is being narrowed 
by an unvarying, monotonous impression. He is losing 
the opportunity for the spontaneous expression of the new 
life that comes only through play. 

From a mental standpoint, child labor is a process of 
mind-stunting. First, the child is removed from the 
possibility of an education. He is taken from the school 
and placed in the factory, where he no longer has an 



Problems of Industry 161 

opportunity to learn. Then he is subjected to monotonous 
toil for long hours, until his mind is dwarfed into the 
familiar form of the unskilled workman. 

The moral effects of child labor are also bad. Entering 
the workroom with adults of all types of morality and 
immorality, the child ceases to be a child in matters of 
worldly knowledge, while he is still a child in ideas. There 
is no home influence or school influence to ward off the 
dangers ; no mother or teacher to point out the hidden 
rocks. 

The effects of child labor on family life are obvious. 
In many localities in the South, where industry is develop- 
ing for the first time, the children work in the E „ on 
mill with their parents. If either parent stays family 
home, it is frequently the father. Under these 
circumstances, the mother has no opportunity at home to 
maintain family standards. Neither in their parents, 
nor in their homes, do the working children see those 
qualities which make the home the ideal of human happi- 
ness. 

It is equally clear that child labor injures society. By 
making of the boy an unskilled worker incapable of earning 
large wages, and by making of the girl a woman E f ect on 
incapable of becoming a strong, normal mother, socie( y- 
child labor inevitably tends to undermine social life. Be- 
cause the boy is forced into the world too early in life and 
made to face its responsibilities, child labor promotes 
delinquency. The inmates of houses of correction were 
usually working boys when they were first arrested. The 
schoolboy is almost a negligible factor there. Both family 
and individual life are distorted by child labor. 

Finally, child labor affects the product of industry. 



162 American Economic Life 

The treasurer of the Alabama City Cotton Mill wrote to 
his agent : " Every time I visit this mill, I am impressed 
Effect on with the fact that it is a great mistake to employ 
the product. sma n ne lp in the spinning room. Not only 
is it wrong from a humanitarian standpoint, but it entails 
an absolute loss to the mill." Child labor is thus waste- 
ful to industry. Manufacturers everywhere are being 
forced to this viewpoint. Child labor is undoubtedly 
cheap labor, but the product is cheaper than the labor 
involved in its creation. 

Consequently, from every standpoint, child labor is 
undesirable. It decreases individual and social welfare 
„ , .. and lowers the standards of the future citizen, 

Regulation 

of child as well as the industrial standards of society. In 
view of these disastrous effects, numerous laws 
have been passed which aim to exclude from work children 
under fourteen, and to safeguard the working lives of chil- 
dren from fourteen to sixteen years of age. In recent 
years the public conscience has been so aroused in this 
direction that, in one year alone (191 3), thirty-one states 
enacted legislation directly bearing upon child labor ; and 
the national government itself established a Federal 
Bureau of Child Labor. 

Women in Industry. — Another problem of growing 
importance is that of women in industry. A half century 
ago women played an insignificant role in indus- 
trial life ; to-day there is not an important branch 
of industry where she is not found. The World War, by 
withdrawing millions of men from industry, resulted in the 
entrance of millions of women into the places made vacant 
by the exigencies of war. But, even in normal times, 
women are assured a place in industry, because that place 



Problems of Industry 163 

has already been established in modern industrial life. 
War merely served to accentuate the importance of women 
as workers. 

The causes of this advent of women into industry are 
obvious. First of all, the minute subdivision of labor 
has given rise to such a degree of specialization w 
in industry that there are innumerable small subdivision 
operations that women can easily perform. For 
example, a girl may paste corners on paper boxes, or stamp 
out pieces of paper to make Christmas cards. Without 
previous training, she will, in a short time, learn to manage 
a machine. At first her efficiency will not be high, but she 
will earn at least enough to assure her future independence. 

Women, having only themselves to support, are willing 
to accept a much lower wage than men. Therefore, when 
they enter industries in competition with men, Lower 
the latter are frequently forced out altogether. wa i es - 
For example, men formerly rolled cigars for a wage sufficient 
to support themselves and their families. Now the same 
labor is performed by girls at a much lower rate. 

The most potent cause of woman's entering in- 
dustry, however, is found in her loss of home employ- 
ment. Formerly, women had so much to do at Loss , 
home that their time was fully occupied. Spin- home em- 
ning, weaving, the manufacture of clothing, and ° ymen ' 
the preparation of foodstuffs, all engaged their attention. 
But the seat of these operations has now been removed to 
the factory. Comparatively little sewing is now done in 
the home, and the cooking is decreasing rapidly. Cleaning 
is the only part of " woman's sphere " left her ; it is small 
wonder, then, that she goes to the factory to escape this 
drudgery. 



164 American Economic Life 

As to the advisability of woman's entering industry 
opinion is divided. Those who are opposed to this tendency 
Arguments point out that the chief function of woman is to 
against. ^ e a h ome maker and to bring up her children 
properly ; that this work still engages enough of her time 
to prevent her from undertaking outside employment; 
that factory labor injures women, and through them, 
their offspring; and that, finally, the presence of women 
in industry cuts down the wages of men. 

On the other hand, those who are in favor of this tendency 
make the following arguments: (1) that, because of the 
Arguments development of the factory system, there is com- 
in favor of. p ara tively little left for women to do at home ; 
(2) that, because skill and dexterity are chiefly required, 
labor is not injurious to women physically; (3) that, by 
entering industry, women are made independent and equal 
to men so that they need not be forced into unhappy 
marriages ; and (4) that it is not fair to force upon woman 
the drudgery of cleaning and cooking which constitute 
so large a part of the regular work of the household. 

However, no matter how divided opinion may be regard- 
ing the advisability of women entering industry, there can 
Regulation ^e ^ttle doubt concerning the necessity of regu- 
of the lating their labor. Woman, like every new ele- 

ment in industry, is easily susceptible of exploi- 
tation at the hands of the unscrupulous employer. Her 
necessity, her willingness, and her first contact with the 
problem, all combine to necessitate some form of pro- 
tection. As a result, the states have passed numerous 
laws restricting the hours of labor, the conditions of work- 
ing, and the night work of women in industry. The 
problem, too, is more easily handled than that of the labor 



Problems of Industry 165 

of men, because the courts are not handicapped to the 
same extent in dealing with women, as they are with men, 
by the right of " freedom of contract.' ' 

Unemployment. — The problem of the unemployed 
varies in importance with changing industrial conditions. 
In times of great prosperity or national exigency, when 
labor is in great demand, little attention is paid to this 
problem ; but, when the industrial or military necessity 
has passed, the army of the unemployed again assumes 
large proportions. 

Unemployment may be due to personal causes, such as 
malnutrition, sickness, and accidents ; or to industrial 
causes, such as industrial crises, labor troubles, causes- 
and seasonal and casual trades. That mal- Personal 
nutrition is a very real cause of unemployment causes - 
was well illustrated by an experiment made in England. 
An unemployed farm colony was started, and the unem- 
ployed from London were set to work on the land. During 
the first few weeks many of the men were so weak from 
lack of food as to be unable to do more than two or three 
hours' work a day, and that of the poorest sort. After 
being maintained for several weeks on good food, these 
same men were doing effective work. Just how extensive 
is the unemployment caused by sickness and accidents we 
have no accurate means of knowing. That sickness and 
accidents exist is certain, and that they cause unemploy- 
ment is obvious ; but, thus far, the lack of organized ma- 
terial on the subject will not permit more than a passing 
reference to them as factors in the problem. 

The industrial causes of unemployment may be grouped 
under the head of seasonal trades, industrial crises, labor 
troubles, and casual trades. Seasonal trades are common, 



1 66 American Economic Life 

and they inevitably mean unemployment. For example, 
outside construction work offers employment only at 
industrial certain seasons of the year. The effects of in- 
causes. dus trial crises and labor troubles upon unem- 

ployment are also apparent. A chart of the coal industry 
shows that work is very slack whenever an industrial crisis 
occurs. For example, in 1902, because of the great coal 
strike of that year, the anthracite mines were worked only 
one hundred and sixteen days, — about thirty-eight per 
cent of the total number of possible working days. A very 
frequent cause of unemployment exists in certain trades 
known as casual trades, — those requiring labor a day 
here or a week there, but never regularly or systemat- 
ically. 

The effects of unemployment are twofold. In the first 
place, the unemployed himself is affected. Idleness leads 
_,_ . , to trouble and lawlessness. Perhaps, too, the 

iinects of 

unemploy- unemployed, in his attempt to secure work, may 
use freight trains as a means of getting from 
place to place. This happy-go-lucky life, once tasted, 
proves too attractive; and the laborer, freed from all 
restraining influences, soon becomes a confirmed " tramp." 
If he is a skilled laborer, the unemployed will lose his 
" knack " of work ; if unskilled, his physical strength. 
In any event, this idleness will be a drain upon his re- 
sources and cause his efficiency to be lowered. But the 
effects of unemployment do not cease with the unemployed. 
They extend to his family. The irregular life of the father 
communicates itself to the children ; and the lack of food, 
resulting from a lack of income, means malnutrition for the 
whole family group. Thus the standard of social efficiency 
is lowered. 



Problems of Industry 167 

To palliate the evils of unemployment some relief, so far 
as the personal causes are concerned, may be found in 
sickness, accident, and old-age insurance. This 
policy has been pursued in many European ereme *• 
countries, and has lately been followed by our own state 
governments. Along with the general movement for im- 
proving the social condition of the worker in regard to 
hours of labor, conditions of work, and the means of safe- 
guarding the health and life of the worker, the policy of 
protecting the workingman through sickness and accident 
insurance has steadily gained ground. But the most 
positive means of solving the problem of unemployment 
is to strike at its causes. If industrial stability can be 
secured, unemployment will cease to exist. This stability 
can be attained only by a comprehensive government 
policy that is planned to meet future needs and possibilities. 
For example, public construction works should be so 
planned that work upon them may be done in times when 
labor is plentiful and employment difficult to secure. 
There should also be a national system of labor exchanges, 
whereby an oversupply of labor in one section may be 
utilized in another district where there is a shortage of 
labor. Again, seasonal occupations should be properly 
dovetailed so that there is no need for temporary idleness. 
All this can be accomplished only by interstate and national 
activities planned with great foresight on an extensive scale. 

QUESTIONS FOR RECITATION 

1. Is child labor a new problem ? Why not? 

2. Where, and in what occupations, is child labor found in the 
United States ? 

3. Discuss the evils of child labor. 



1 68 American Economic Life 

4. Where is child labor most harmful? Why? 

5. What is the remedy for child labor ? 

6. What has your state done in regard to child labor? 

7. Why are women entering industry ? 

8. What can be said in favor of this movement? 

9. What reasons are advanced against women working? 

10. Why should legislation be passed to protect working women? 

11. Is unemployment an important problem at present? If 
not, why should we consider it ? 

12. What gives rise to unemployment, — individually? Socially? 

13. What is the effect of unemployment on industrial efficiency? 
On social welfare ? 

14. How may the evils of unemployment be remedied, (1) nega- 
tively? (2) Positively? 

PROBLEMS FOR DISCUSSION 

1. Discuss the causes of child labor. 

2. Is child labor necessary to the production of captains of 
industry ? 

3. What is the effect on children of keeping them away from 
work until they are sixteen? Until they receive a college train- 
ing? 

4. Who is the chief gainer from child labor? Who is the chief 
loser ? 

5. Are parents responsible for child labor? 

6. To what extent are the children themselves responsible? 

7. Is it justifiable for women to enter industry? 

8. Would you permit your wife or daughter to take up a gainful 
occupation ? 

9. Is the frequently made statement — "woman's place is in the 
home " — true ? Defend your position. 

10. Is unemployment necessary? Explain your answer. 

11. What is the English system of labor exchanges? 

12. On what grounds should society seek to prevent unemploy- 
ment? 

13. Is there any "right to work"? 

14. Should the government guarantee work at all? 



Problems of Industry 169 

15. On what ground can you justify governmental action in any 
of these problems ? 

16. What has the national government done in these matters? 

17. What must the government still accomplish in this direc- 
tion? 

SUPPLEMENTARY READING 

Abbott, E. Women in Industry. 

Adams, T. S., and Sumner, H. L. Labor Problems. 

Beveridge, W. H. Unemployment. 

Burch, H. R., and Patterson, S. H. American Social Problems, 

Chap. XIV. 
Devine, E. T. Social Forces, Chap. III. 
Mangold, G. B. Child Labor Problems. 
Reports of National Child Labor Committee. 
Richardson, D. The Long Day. 
Seager, H. R. Social Insurance, Chap. IV. 
Spargo, J. The Bitter Cry of the Children. 



CHAPTER XVIII 

Social and Industrial Education 

I. Educational ideals 
i . In ancient times 

2. In the Middle Ages 

3 . In modern times : 

a. The new ideal 

b. The changed conditions : 

(i) How met by higher education 
(2) How met by secondary education 

II. Uniformity in elementary education 

1 . Extent of uniformity 

2. The consequences : 

a. " School mortality " 

b. Illiteracy 

c. Child labor 

d. Lack of preparation for life 

3. The remedy — differentiation : 

a. For boys and girls 

b. For city and country 

c. For head workers and hand workers 

d. For different trades 

4. The outlook 

Educational Ideals. — Education is the most potent 
factor in the promotion of social welfare and in the develop- 
in ancient ment of industrial efficiency. It is the motive 
times. force of civilized society. While it has existed in 

some form or other from time immemorial, its ideals have 
gradually changed from one historic period to another. 

170 



Social and Industrial Education 171 

Among the ancient peoples of the East, where the religious 
ideal predominated, education was confined to the priestly 
caste and consisted largely of the memorization of sacred 
texts. The Greeks were the first to emphasize the liberal 
ideal in education and to give to the individual the op- 
portunity for self-development untrammeled by religious 
traditions. Men have never ceased to marvel at their 
intellectual and artistic attainments; nor yet to imitate 
them. This process of imitation was first begun by the 
Romans, who, however, became more practical and legal- 
istic in their own development. 

With the establishment of Christianity throughout 
Europe, the religious ideal again dominated the spirit of 
education in the Middle Ages. While the old Inthe 
learning and the rare manuscripts were preserved Middle 
in the monasteries, the liberal spirit itself was dis- 
placed by one of religious asceticism. With the Renais- 
sance, however, the liberalizing and individualistic spirit 
appeared once more. After centuries of inertia, freedom 
of inquiry was again stimulated and men reached out for 
the long lost culture of the past. At the same time, the 
spirit of inquiry penetrated into science and the world of 
life. As this period drew to a close, men were peering 
everywhere into all fields of human knowledge and, in 
addition, had restored the old culture of the Greeks and 
Romans to a dominating position in civilized society. 

The " classics " continued to hold this dominating 
position in our educational system until our own genera- 
tion. To-day, however, we are gradually wit- In modern 
nessing the growth of a new ideal in education, times: The 
It is the ideal of social welfare brought about by 
individual efficiency. No longer is education regarded as 



172 American Economic Life 

the privilege of the few; no longer is it monopolized by 
culture. Its aim is not merely to equip a small group 
of men with the highest culture of the past. It still per- 
forms this function; but, in addition, it aims to furnish 
the masses with the means of promoting their welfare and 
efficiency. This new ideal is not aristocratic, but demo- 
cratic ; not merely cultural, but useful ; not purely indi- 
vidual, but largely social. 

This change in the educational ideal has been necessi- 
tated by the conditions of modern life. Since the great 
The Industrial Revolution of the eighteenth century, 

changed the civilized world has become increasingly in- 
1 tons, dustrial and social in all its relationships. Man's 
interests are no longer confined to any one type of culture. 
Because of the tremendous changes of the nineteenth and 
twentieth centuries in economic and social matters, the old 
learning fails utterly to equip man with the kind of knowl- 
edge necessary to solve the problems arising from the 
development of modern science, from the growth of industry, 
and from the spirit of cooperation. The new learning, 
therefore, emphasizes the importance of practical science, 
of industrial knowledge, of sociological information, and of 
vocational and professional training. 

The institutions of higher learning have been the first in 
America to make an attempt to meet these changed condi- 
tions. Realizing that education in its truest sense is prepa- 
ration for the work of life, these institutions have incorpo- 
rated into their curricula courses which have a direct bear- 
ing upon the life of the individual. Schools of engineering, 
of commerce and industry, of agriculture, of architecture, 
and of like character, are all striking examples of this new 
readjustment. 



Social and Industrial Education 173 

This tendency to prepare individuals for practical life so 
that they may be given the basis of complete living may 
be observed also in secondary education. In addition 
to the classical high school, we now have, in most of our 
large cities, high schools with manual training, commercial, 
and vocational courses. It is true that much remains 
to be accomplished in the direction of socializing secondary 
education; but too much credit cannot be given to the 
pioneers in this movement, who, seeing the evolution of 
modern life, have attempted to make the educational 
system conform to its needs. Of the socializing movement 
in education, Edward T. Devine says, " Its end is practical, 
being the utilization of whatever is usable in that which 
the student gets from history and literature and science, 
from disciplinary studies and from cultural studies, to en- 
rich his civic life, to insure his becoming a contributor to 
social welfare instead of its debtor, to make him less a 
parasite and more a creator of social values." 

Uniformity in Elementary Education. — It is in primary 
education that this tendency is last to appear. The course 
of instruction given the child in the elementary Extent of 
school is, in many cities, still largely traditional uniformity, 
and generally uniform. While it is true that, here and 
there, experiments and innovations are being introduced, 
the underlying principle still remains the same. The 
primary school is but a ladder to the high school; the 
high school leads to the college. There has been little 
attempt to make elementary instruction fit the child's 
individual needs and to provide for his future place in the 
social system. 

While it is true that this uniformity results in an equality 
of equipment for those completing the first years of school 



174 American Economic Life 

life, it is nevertheless disastrous to those who do not 

survive the rigidity of the work. Since the prescribed 

course is distasteful, the beginner drops out of 

J. he consc- 

quences: the race before it is fairly begun. Striking 
" School evidence of this fact is found in the high per- 

mortality ." 

centage of elementary " school mortality." This 
mortality increases as the grades advance and would be 
appalling were it not for compulsory education laws. 

The extent of illiteracy in the United States is not generally 

realized. Its prevalence, however, is proved by 

Illiteracy. . . . ' _ . P , 

census investigations and by the records of the 
World War, which revealed the presence of 7,000,000 adult 
illiterates in the United States. A census bulletin tells us 
that somewhat more than one-tenth (106 per 1000) of the 
population at least ten years of age is illiterate. The im- 
portance of this statement becomes particularly significant 
when a comparison is made between illiteracy in the United 
States and in European countries before the World War. 
Of every thousand inhabitants in Germany, Norway, and 
Sweden, one was illiterate; in Switzerland, three; in 
Denmark, five ; in Finland, sixteen ; in France, forty- 
nine ; and in England, fifty-eight. 

Another consequence of the school's inability to hold 
children because of its uniform curriculum is found in the 

existence of child labor. " The most potent 

Child labor. . . . . ., , . . 

reason, m my opinion, why children are in the 
factory is our school system." This statement by a fac- 
tory inspector of Louisiana voices the opinion of many 
social workers who point to the school as a frequent 
cause of child labor. There is little doubt that many 
children prefer the work of the factory to that of the 
school. 



Social and Industrial Education 175 

Finally, the effect of uniformity in elementary educa- 
tion extends to a lack of preparation for life. Children 
leave school and go to work because the school T L . 

° Lack of 

system fails to prepare its pupils for the life of the preparation 
world. Seven-eighths of the school children of 
the United States never enter the high school. " Yet," 
said a critic of our educational system, " one who goes out 
of the school system before the end, or at the end, of the 
elementary course, is not only unprepared for any vocation 
which will be open to him, but too commonly he is without 
that intellectual training which should make him eager 
for opportunity and incite him to the utmost effort to do 
just as well as he can whatever may open to him." 

What, then, should be done to make the school system 
more attractive and of greater service to the average boy 
and girl ? This question is not difficult to The remed 
answer. The work of the school should be dif- — differen- 
ferentiated according to the needs of the indi- 
vidual and of the community. Different training should 
be provided for girls and boys, for city children and country 
children, for head workers and hand workers, and for 
workers in different trades. Life is so varied that no one 
training is suited to all. 

In the first place, there is no doubt that sex should play a 
part in determining the character of education. While 
it is true that during certain periods of life several For boys 
millions of women are engaged in industrial pur- and girls - 
suits, woman, nevertheless, is primarily engaged in the 
home. Just as the great majority of boys will grow up 
to use their hands, so the great majority of girls will grow 
up to be wives and mothers. It is perfectly evident, there- 
fore, that elementary instruction should provide one kind 



176 American Economic Life 

of training for home makers, and another kind for bread- 
winners. A system of education which fails to recognize 
this principle is altogether inadequate to meet the needs 
of modern life. 

Likewise, another differentiation is equally fundamental. 
The training of boys and girls in the city should differ 
For city and essentially from the training of country boys and 
country. girls. Education, primary as well as secondary, 
should bear a direct relation to the adult life of the child. 
City conditions are so totally different from country condi- 
tions that each set of conditions demands a training pecu- 
liar to itself. Industry is the keynote of city life and 
agriculture the basis of country life. Therefore, the train- 
ing of city people should be largely industrial and com- 
mercial, while that of country folk should be chiefly agri- 
cultural. 

It is equally obvious that in the city different training 

should be provided for head workers and hand workers. 

In general, the elementary curriculum in the 

worker s and past has made provision simply for head workers. 

hand -g u j. p erna p S three-fourths or seven-eighths of all 

workers. . . 

the boys and girls who go through city schools 
will be called upon to do work with their hands. An 
education which prepares for industrial efficiency will, 
therefore, make provision in the earliest grades for training 
in some form of hand work. 

The disappearance of apprenticeship from modern life 
has necessarily widened the scope of industrial training 
For diferent m our public school system. Save in a few 
trades. trades, such as plumbing, the old apprentice 

form of training has passed away. As a result, a new 
duty has been imposed upon the school, and, in many 



Social and Industrial Education 177 

large cities, we find educational authorities gradually 
recognizing this obligation. 

If this differentiation in training along the lines just 
indicated is carried out, the elementary school, by losing its 
uniformity, will be brought into closer harmony The out- 
with the conditions of modern life. A happy look * 
augury for the future is found in the fact that, in many of 
our larger cities, attempts are being made to bring about 
this closer relation between the work of the school and the 
work of life. For example, the introduction of sewing and 
cooking, the provision for elementary manual training, 
the introduction of the " Gary System," the establishment 
of trade schools for boys and girls, the junior high school 
movement, and the organization of vocational courses 
are all hopeful indications of a recognition of this principle. 
Preparation for life, which is the ideal of the newer educa- 
tion, will ultimately shape the work of the elementary 
schools, as it is molding that of the high school and the 
university. 

QUESTIONS FOR RECITATION 

1. Discuss the early ideals of education. 

2. Show the conditions that gave rise to these ideals. 

3. Do these ideals persist in education to-day? Are they uni- 
versally accepted in America ? 

4. What is the new educational ideal? Is it universally ac- 
cepted ? 

5. Explain clearly how this new ideal has arisen. In your 
opinion, is it final or ultimate ? 

6. Why do educational ideals change? 

7. What kinds of knowledge does the modern educational ideal 
emphasize ? Why ? , 

8. How is the new ideal reflected in our universities? 

9. How has the public high school met the conditions of mod- 
ern life ? What is yet to be done in this direction ? 



178 American Economic Life 

10. What is a distinguishing feature of elementary instruction 
in American public schools ? 

11. What modifications of the uniform curriculum are necessary 
to bring about a better industrial and social training in the ele- 
mentary school ? Explain the necessity for each. 

12. What are the disadvantages of the uniform curriculum of the 
elementary school ? Explain each. 

13. Is America progressing in the right direction in shaping her 
public educational system? What reasons have you for so think- 
ing? 

PROBLEMS FOR DISCUSSION 

1. What should be the purpose of education? 

2. Should there be definite connection between school life and 
life in the world ? Why ? 

3. What does the school in your community do to prepare boys 
for the work of life? 

4. What life preparation does the school furnish for girls ? 

5. Should some form of manual training be introduced in all 
grades between the kindergarten and the high school? How could 
this be done? Is the same true of commercial training,? 

6. Should the public school include domestic science training for 
girls? Why? 

7. Is universal education desirable ? Explain your answer. 

8. What advantages or disadvantages would accrue to the coun- 
try if free education were abolished ? 

9. Would it be wise to make it possible for everybody to secure 
a college education? Why? 

10. What has the college done to prepare men and women to meet 
the work of life ? 

11. What is the economic basis of education ? The social basis? 

12. What difference is there between public and private schools 
in regard to educational policy and ideals ? 

13. Discuss the work of Herbert Spencer in education. 

14. What right has the student of economics to be interested 
in education? 



Social and Industrial Education 179 



SUPPLEMENTARY READING 

Devine, E. T. Social Forces, Chaps. VIII and XIII. 

Dewey, J. Democracy and Education. 
Dewey, J. Schools of To-morrow. 
Draper, A. S. American Education. 
Gillette, J. M. Vocational Education. 
King, I. Education for Social Efficiency. 
Spencer, H. Education. 



CHAPTER XIX 

The Nature of Capital 

I. Character of capital 
i . Its importance : 

a. In primitive times 

b. In modern times 

c. In capitalistic production 

2. Examples and definition of capital 

3. Wealth may be consumed : 

a. Unproductively 

b. Productively 

c . The final consequence : 

(1) The diagram 

(2) The effect of war 

II. Money and capital 

1. Is money capital? 

a. When it is 

b. When it is not 

2 . The newer viewpoint : 

a. Its advantage 

b. Its disadvantage 

3. Capital goods and money capital 

4. The conclusion 

Character of Capital. — Land, or natural resources, and 

labor, or human energy, are spoken of as primary essentials 

in production because both must be present at 

tance: in a ll times in every productive operation. The 

primitive fig^ m ^ e stream, and the coal on the mountain 

Hmes. > 1 

side, cannot be converted into wealth, if there 
are no people to catch the one, or to pick up the other. 

180 



The Nature of Capital 181 

In the same way, if there are no fish to catch and if there 
is no coal to mine, labor will be helpless and unable to 
produce wealth. There is, however, still another factor 
in production. While land and labor are the primary 
essentials in any productive operation, there is a secondary 
essential, — capital. ' Capital is spoken of as secondary 
because it is the result of the application of labor to natural 
resources. If all the capital in a community were de- 
stroyed, it could be replaced by the application of labor to 
land. In primitive times little, if any, capital really 
existed. What capital we now have, therefore, is the 
result of man's utilization of natural resources; it is the 
offspring of land and labor. 

Modern industry, however, requires the presence of 
all three factors. To-day, capital is as essential to pro- 
duction as land or labor. It is impossible to In mo & ern 
picture a present-day productive enterprise hmes - 
being carried on without the aid of capital. The old 
primitive methods have gone forever. The spectacle of a 
savage catching fish from the brook with his hands, i.e. 
without capital, has no modern counterpart. Hooks and 
nets, the products of past industry created by application 
of labor to land, have now become as essential to fishing 
as the fish and the man himself. Therefore, to catch fish, 
i.e. to produce wealth by creating utilities in the fish, 
capital is required. 

Thus, modern production is distinctly capitalistic 
production. By this we mean that man has inextricably 
introduced into production a third factor, which In caj)ital _ 
has become co-equal in importance with land istic pro- 
and labor. This capitalistic production has 
changed the old direct relationship that existed, in primitive 



1 82 American Economic Life 

times, between man and nature. Instead of being simple 
and direct, production now becomes complex and indirect. 
In fact, capitalistic production is exceedingly roundabout, 
and becomes still more so with every advancing step of 
civilization. With the age of inventions and the develop- 
ment of machinery, the process of production has become 
so complicated and the importance of capital so tremendous 
that civilization itself is spoken of as being in the capitalistic 
stage of development. The new factor at times almost 
overshadows the original elements ; the child almost 
dominates the parents. Instead of depending upon primi- 
tive implements and crude tools, production now depends 
upon huge plants and factories equipped with costly machin- 
ery and other highly specialized products of past industry. 

There are a thousand ways in which the products of 
past industry aid man in producing wealth, and every such 
instrument constitutes a form of capital, 
^xamp es Uricier this term we may include : (i) improve- 
definition me nts on land; (2) roads, railroads, telegraph 
and telephone lines; (3) tools, machines, and 
mechanical appliances; and (4) raw materials to be used 
in later manufacturing. All these constitute wealth, and 
all help man to produce additional wealth. Capital, 
therefore, may be said to be that part of wealth used to 
produce more wealth. It is the " tools " of production. 

All wealth is not capital. The test whether or not wealth 
is capital is the way in which it is used. If a nation or an 
„ r " individual has wealth and consumes it unpro- 

Wealth m ... 

consumed: ductively, then this wealth is not capital. The 

Unproduc- man wno dissipates a fortune prevents the 

employment of so much wealth as capital. 

The Pyramids of Egypt, although representing a vast 



The Nature of Capital 



183 



outlay of materials and labor, are not capital. Wealth 
used unproductively, whether by man or by society, is not 
capital. 

Wealth may, however, be consumed productively. 
The wealth represented by railroads, machinery, and 
buildings is capital because it is being used to p ro d uc - 
produce more wealth. Capital, therefore, de- hvely - 
pends upon the productive use of wealth. A man with a 
fortune, instead of squandering it, may invest it in a 
business and thus convert it into capital. A nation with 
great natural resources may so direct its energies as to 
produce vast quantities of goods to be used in future 
production. 

Every individual possessed of wealth has, therefore, two 
choices open to him. He may use it productively or un- 
productively. If, through waste, luxury, and The final 
extravagance, man uses his wealth unpro- consequence. 
ductively, he not only destroys his own wealth, but also 
decreases the productive forces of the community. On 
the other hand if, by enlarging his 
plant and installing new machinery, 
he uses his wealth productively, he 
not only keeps his original wealth but 
adds to it through production. 

This principle may be illustrated 
by the accompanying diagram. When 
$10,000 worth of wealth is consumed 
along the line U, that is, unproduc- 
tively, it becomes completely dissi- 
pated. The individual, himself, loses 
it and its consumption, let us say, in 
the form of extravagant banqueting 




184 American Economic Life 

and entertaining, results in lowering the efficiency of the 
productive forces of society. When, however, this same 
wealth is consumed along the line P, its consumption results 
in the production of $500 more wealth and the original 
$10,000, which is now capital, remains in industry. If, 
instead of consuming wealth in the form of extravagant 
and luxurious living, man invests his wealth in govern- 
ment bonds, in bank holdings, or in some other form of 
productive enterprise, he ceases to be a spendthrift and 
becomes thereby a capitalist. 

In this connection it is well to contemplate the effect 
of war upon capital. Nations, like individuals, may reck- 
lessly waste the wealth of society. When, like Germany 
before the World War, they are consciously organized for 
the promotion of war and conquest, they are known as 
militant societies, as distinguished from industrial so- 
cieties, where the governmental organization is directed 
toward the production of national wealth and the pro- 
motion of social welfare. The United States has always 
been organized politically along the line of industrial 
development. As a result, the accumulations of capital 
in this country are greater than in any other single nation 
in the world. On the continent of Europe, war has resulted 
in the destruction of billions of dollars' worth of wealth 
and capital. If it were possible to abolish war, all this 
unproductive consumption of wealth would be eliminated. 
If this is not possible, a nation's war machinery should be 
made secondary to its industrial life. In this manner, fleets 
and armies become a protective agency for the development 
of industry and national life. This is the American policy. 

Money and Capital. — One of the first questions that 
arises in a discussion of capital is the query, " Is money 



The Nature of Capital 185 

capital ? " Money is a product of past industry and is used 
to assist in production. In order to prepare it for circula- 
tion, the mint, equipped with expensive capital, Is money 
has expended labor in turning the bullion into capital? 
its present form. Furthermore, money is an when u ls ' 
absolute necessity in productive operations. The grocer 
needs money to make change ; the manufacturer needs it 
to pay his employees on Saturday night; the consumer 
needs it to purchase bread from the baker and milk from 
the dairy. In other words, money performs a very essential 
part in aiding modern production. If money, then, is the 
product of past industry and performs a part in production, 
it must be capital. 

But these arguments do not apply to all money. If a 
man should receive fifty dollars and should put them in a 
stocking behind the chimney, this money would when it 
not be capital because it would not be assisting ** noL 
in production. It is, therefore, fair to conclude that, 
as with other commodities, money may be capital or it may 
not be capital. The question as to its status at any given 
time may be determined only by knowing whether or not 
the money under consideration is being used to assist in 
production. 

This statement represents one view of capital, accord- 
ing to which goods assisting in production, whether directly 
or indirectly, are included in capital. According The newer 
to another view, in order to be capital, a good viewpoint: 
must aid directly in production. The ax used by a wood- 
man to cut down a tree is capital, because it is the product 
of past industry and is being used directly to assist in 
future production. On the other hand, the breakfast 
eaten by the woodman assists production only indirectly 



1 86 American Economic Life 

and therefore may not be capital. Economists are accept- 
ing the latter view more and more, so that money in order 
to be capital must assist directly in productive operations, 
— that is, it must be used by the grocer to make change, 
by the employer to pay wages, or by the producer to pur- 
chase raw materials. 

This newer view has the advantage of clarity of thought 
and directness of understanding. It is easy to determine, 
its ad- i n a given case, whether an actual good is assist- 

vantage. m g m production. The ax really does aid in the 
productive enterprise of lumbering; while the breakfast 
may not only not aid in production, but, by causing in- 
digestion, result in an actual loss of productive power. 
It is a simple device, therefore, to divide goods into " con- 
sumption goods " and " capital goods." Food, clothing, 
and shelter are obviously in the former class, while factories 
and machinery are in the latter group. 

However, it is questionable whether all goods can be 
disposed of so easily. Sometimes the consumption good 
its disad- plays a most important, if indirect, part in the 
vantage. process of production ; in fact it is often essen- 
tial to the final act of production. Are we, therefore, on a 
mere technicality of definition, to deny such a good the 
right to the term capital? During the World War, for 
example, the production of ships at Hog Island in Phila- 
delphia was greatly delayed, and therefore decreased, by 
reason of the fact that proper housing could not be pro- 
vided the workers. A home for the worker was, in this 
case, just as essential to the production of ships as the tools 
with which he worked. The first aided indirectly, as 
much as the second aided directly, in the process of pro- 
duction. 



The Nature of Capital 187 

As ordinarily used, the term capital refers to a more or 
less continuous and unchangeable thing. A business may 
be capitalized at fifty thousand dollars for 
twenty years. During this time, however, good^fand 
every tool and machine used in the work may mo ? e y 
have been replaced by new ones. The " capital " 
has remained the same, but the " capital goods " — the 
various elements making up the capital — have been worn 
out and replaced. In this fact lies an important distinc- 
tion. Capital is the intangible, continuous thing which 
represents the total money value of the particular wealth- 
producing products employed in the production of new 
wealth. Capital goods, on the other hand, represent the 
individual machines, engines, and other tools of production, 
which wear out in the course of time and are replaced. 
Capital is a constant factor. Capital goods are constantly 
changing. 

Throughout all these distinctions, however, the funda- 
mental nature of capital is apparent. As a first requisite, 
capital must be material wealth. Popular xhe con- 
writers and speakers are fond of referring to cluslon - 
" brains " as capital and of using the phrase " capitalizing 
the intellect." But these expressions are merely figurative. 
Brains may be greater than capital, but they do not con- 
stitute capital in the economic sense, because they are 
not material wealth. In the second place, not all material 
wealth is capital. Only that part of material wealth is 
capital which assists in production. The part is not equal 
to th§ whole. Finally, this assistance is usually, if not 
always, a direct element in the process of production. 



188 American Economic Life 



QUESTIONS FOR RECITATION 

i. Contrast the importance of capital before the eighteenth 
century with its position after the eighteenth century. 

2. Give some examples of capitalistic production. 

3. Define capital. Give ten examples. 

4. Is your fountain pen capital ? Explain fully. 

5. Why do we put our wealth into railroads rather than into 
pyramids ? 

6. Are the following capital: pig iron, a plow, candy in the 
store, tobacco in the laborer's pipe, coal? Tell why in each case. 

7. If you had $1000 left you, would you take a pleasure trip or 
go to college ? Why ? 

8. Show, by historical illustrations, the effects of war upon 
capital. 

9. Is money capital ? Why? 

10. What is the most definite point of view to take regarding the 
way in which capital should aid in production ? Give an example. 

11. What disadvantages has such a point of view ? Illustrate. 

12. Show the difference between capital and capital goods. Give 
examples. 

PROBLEMS FOR DISCUSSION 

1. Why is labor called "the mother of capital"? Is it true? 

2. What are the consequences of capitalistic production upon 
labor ? 

3. Discuss the relation between the consumption of wealth and 
the creation of capital. 

4. Show how you yourself may become a capitalist. 

5. Distinguish between natural resources and capital; give 
examples. 

6. Distinguish between wealth and capital ; give examples. 

7. During the World War, did capital in the United States in- 
crease or decrease ? Explain this phenomenon. 

8. Does capital really produce? How? 

9. Name some employment, if you can, in which labor produces 
without capital. 



The Nature of Capital 189 

10. Are securities capital ? Explain your answer. 

11. Explain the importance of banks to the community. 



SUPPLEMENTARY READING 

Ely, R. T. Outlines of Economics, Chap. VII. 
Fetter, F. A. Principles of Economics, Chap. IX. 
Fisher, I. The Nature of Capital and Income, Chaps. I, II. 
Marshall, A. Principles of Economics, Book IV, Chap. VII. 
Mill, J. S. Principles of Political Economy, Chaps. Ill, IV. 
Seager, H. R. Introduction to Economics, Chap. VII. 
Thompson, C. F. Elementary Economics, Chap. X. 



CHAPTER XX 

The Increase of Capital 

I. Origin of capital 

i . Capital results from saving : 

a. How men first saved 

b. How the habit spread 

c. How savings are capitalized : 
(i) By the bank 

(2) By individuals 

(3) By corporations 

(4) By other companies 

2. Capital may result from efficiency 

3. Capital increases with : 

a. The desire to save 

b. The amount that can be saved 

II. Kinds of capital 

1 . The different forms : 

a. Circulating and fixed capital 

b. Specialized and free capital 

2 . The dangers : 

a. From too much fixed capital 

b. From too much specialized capital 

c. From mismanagement of capital 

Origin of Capital. — When the savage of Australia found 
a whale, which had drifted ashore in a storm, he at once 
Ca itai summoned his friends and neighbors and had a 

results from banquet. Sometimes they ate for a week, and 
sometimes longer, and sometimes they died 
from overeating ; but they ate until all of the whale was 

190 



The Increase of Capital 191 

gone, and then eked out an existence on berries and such 
food as they could find until the gods should send them 
another whale. Civilized man, however, has a different 
method of treating wealth. When he secures a large 
amount of food, or its equivalent in money, he does not 
eat it up at once, but puts by a portion for a " rainy day." 

Even within comparatively modern times society has 
possessed only a relatively small amount of wealth, most 
of which was needed for present consumption. How men 
In such times, therefore, capital could be accumu- first saved - 
lated only by saving; that is, instead of consuming all 
that he produced, man abstained from consumption and 
consumed but a small amount of what he would otherwise 
have used up. When he had saved sufficient wealth 
through this abstinence, he used it to secure some new tool, 
such as a windmill or a sailboat, that would increase his 
power to produce wealth. 

As a result of this early necessity for saving, the ideal 
of saving spread throughout the whole race by means of 
the teachings of the family, the schools, the How the 
churches, and other agencies of instruction, kaint spread. 
The consequence of this education was the development of a 
strong desire to save. To-day this attitude is well illus- 
trated by the immigrant, who comes to the United States 
and subsists on a comparatively low standard of living in 
order that he may have a competence for his old age. 

Saving has thus become one of the virtues of civilization ; 
yet few who save really understand the connection between 
saving and capital, and the great service per- How sav _ 
formed by the bank in this respect. A child ingsare 
receives a five-dollar gold piece from its grand- 
mother and takes it home in great glee. Acting on the 



192 American Economic Life 

advice of his parents, he puts the gold piece in the savings 
bank with the implicit belief that the same five-dollar 
gold piece will be returned by the bank whenever the 
demand is made upon it. But the bank is not doing 
business in this way. 

The bank acts as a loan agent. For example, a pro- 
spective shoe manufacturer wishes to start business, and 
the bank, upon being furnished proper security, lends him 
fifty thousand dollars. The child's five-dollar gold piece, 
together with hundreds of similar deposits, goes to make 
up this loan. With the money or credit thus secured the 
manufacturer begins work. He builds his factory, em- 
ploys labor, and enters the shoe market, using his wealth 
to produce more wealth. At the end of a year he has done 
such a successful business that he has made fifteen per 
cent on his original investment. Out of this fifteen per 
cent he pays the bank six per cent for the use of its money 
or credit, and out of this six per cent the bank pays the 
child three per cent, or fifteen cents, for the use of his five 
dollars. In this way, every one engaged in this capitalistic 
transaction has been the gainer. 

For many years this was almost the only method of 
capitalizing savings, and it is still the most usual means 
employed. The bank acted as a loan agent for any one 
who wished to secure money and who could furnish reliable 
security as collateral. Its loanable funds were secured 
from a large number of people in the community, each of 
whom wished to invest a small amount of money, but no 
one of whom was sufficiently well off to be able to lend a 
large sum such as a manufacturer would require. 

There were, to be sure, cases of individuals who had saved 
considerable sums; and, when Farmer Williams wished 



The Increase of Capital 193 

to build a barn, he went to Farmer Jones and borrowed 
five hundred dollars on a mortgage. But this was an un- 
certain way of carrying on an enterprise. Every com- 
munity did not have a Farmer Jones. Besides, as industry 
grew, neither five hundred dollars nor five thousand 
dollars was enough to start a business. Even though he 
had it, no person wished to lend the large sum necessary 
to begin a modern business enterprise. 

To meet this contingency a new plan has recently been 
developed and perfected. The shoe manufacturer decides 
to begin business, but, instead of going to the bank with 
his collateral and borrowing fifty thousand dollars, he in- 
corporates his business ; that is, he secures a charter, a 
board of directors is appointed, and stocks and bonds are 
issued. These stocks and bonds are then sold to the people 
in the community who wish to invest their money and who 
do not wish to engage in business themselves. Thus, 
perhaps without the intervention of the bank and with the 
bank's profit eliminated, the business man secures his 
capital directly from the person who has saved it and who 
desires to invest it. At the same time, no one is called on 
to invest a large amount. A company may be capitalized 
for ten million dollars, but an individual, by buying merely 
one share, needs to invest only fifty or one hundred dollars 
in the enterprise. 

Trust companies, insurance companies, and, in a limited 
sense, building and loan associations likewise exercise the 
functions of the bank and act as loan agents for investors 
and borrowers ; but, in recent years, the corporation, by 
selling stocks and bonds and paying good rates of interest, 
has sometimes taken the place of the intermediary banking 
establishments and gone directly to the individual saver. 



194 American Economic Life 

When wealth is scarce and living precarious, man must 

scrape and save in order to put something aside for the 

future. But the problem of capital may be 

Capital may ^ . J 

result from looked at from another standpoint. To-day, 
efficiency. w k e re wea lth is plentiful, man's ability to 
accumulate capital may depend not only on saving but 
also on efficiency. For example, a man earning thirty 
dollars a week, and desiring to become a capitalist, has 
two courses open to him. He may lower his standard 
of living, and, by consuming less than he requires, save 
ten dollars of his weekly wages. Or, by hard work and 
additional training, he may increase his efficiency so that 
he now has an earning capacity of forty dollars a week. 
This extra ten dollars then forms a fund for investment 
and starts him on the road of the capitalist. 

The increase of capital, therefore, depends upon two 
elements. In the first place, man must develop the dis- 
Capitai position to save. It is here that the ideal of 

"\Tl ases thrift assumes its greatest importance. So long 
Desire as individuals are wasteful and extravagant, 

to save. little if any capital can be accumulated. In fact, 

under these conditions the capital in existence will quickly 
disappear. This desire to save, too, is a measure of the 
individual's stage of development. Civilized man is 
thrifty, and places the future above the present, the un- 
seen above the seen. Primitive man is improvident, and 
places the present above the future, the seen above the 
unseen. So long as such wasteful qualities prevail, no 
progress can be attained. The people of Holland and 
France are typical examples of civilized societies that 
show what may be accomplished through the development 
of thrift in industry. 



The Increase of Capital 195 

But the desire to save is in itself not sufficient for the 
development of capital. Capital will not increase merely 
through a desire to save ; there must be some- Amount that 
thing to save. The greater that " something," can be saved - 
the greater will be the possibilities for the increase of 
capital. Here it is that the idea of efficiency becomes 
important. The amount of wealth produced increases 
with the efficiency of the worker. So long as a people 
are inefficient and backward in production, just so long 
will they fail to accumulate a large fund of capital. This 
has been China's great drawback throughout the cen- 
turies. On the other hand, the American system of pro- 
duction is so efficient that the fund from which capital 
is drawn is constantly increasing. Professor Friday of the 
University of Michigan estimated that the capital in the 
United States increased from $4,522,000,000 in 1913 to 
$21,510,000,000 in 1918. He further maintained that 
"in 1 91 8 approximately thirty per cent of our national 
income " was saved. 

Kinds of Capital. — We have yet to examine the different 
kinds of capital and the problems arising from them. 
Capital is described as " circulating " or 
"fixed," and as "specialized" or "free." circulating 
Circulating capital is capital which is de- and fixed 

capital. 

stroyed by a single use, such as coal, and other 
raw materials immediately consumed. In contrast to 
this, fixed capital is capital which can be used for a con- 
siderable length of time without being destroyed. Ex- 
amples of fixed capital are locomotives, factories, and 
ships. 

Again, capital which is molded into a form which can be 
used only for a particular purpose is called specialized 



196 American Economic Life 

capital. The degree of specialization may be great or 
moderate. For example, a press which will stamp out 
specialized twenty-dollar gold pieces is an extreme form 
capital. f specialized capital, because there are but 

a few places in the world where twenty-dollar gold pieces 
are stamped. A crane built to carry fifty tons is a less 
specialized form of capital. The crane may be of service 
in any one of several industries, while the coin press can be 
used in but one. 

In contrast to this, capital is said to be free when At 
exists in a form that may be used in a large number of 

industries. For example, pig iron is free capital. 

It can be converted into carriage springs, drills, 
car wheels, and hundreds of other things. The ordinary 
machinist's lathe is somewhat specialized, but it would be 
considered almost free in contrast with a lathe made to 
turn a ten-thousand-pound shaft. When capital is usable 
in only a few ways, it is specialized ; when it is usable in 
many ways, it is free. 

One of the great problems in the development of capital 
is to determine how much capital should be utilized in the 

form of fixed, and how much in the form of 

Dangers : 

From too circulating, capital. Wealth in the form of 
much fixed fixed capital cannot of course be converted imme- 
diately into circulating capital, and the progress 
of the community may thus be seriously hampered by the 
lack of a sufficient amount of circulating capital. For 
example, one of the causes of the panic of 1873 was the 
conversion of a large amount of the wealth of the community 
into fixed capital in the form of railroads. As it turned 
out, too great a proportion of the country's wealth was 
put into this form of capital and a business tie-up resulted. 



The Increase of Capital 197 

In the same way, if too large a proportion of capital is 
turned into specialized goods, it is clear that industry 
will suffer because of a lack of capital which 
can be diverted into the kinds of production much spe _ 
that will meet the changing demands of modern cialized 

° ° capital. 

society. In the early part of the nineteenth 
century an enormous amount of wealth was converted into 
canals, — a form of fixed specialized capital. Many more 
canals were built than the traffic warranted, and the 
wealth sunk in many of the canal projects was completely 
lost. The present mobility of capital in the United States, 
that is, its ability to change from one use to another, is 
shown by the marvelous growth of the automobile industry. 
So long as capital is sufficiently mobile to flow readily from 
one industry to another, or so long as there is sufficient 
wealth to form capital for new industries, the industrial 
conditions in the community are sound. 

Since modern production is so intimately connected with 
the maintenance of capital, the question of its management 
is of vital importance. Capital is brought to- 
gether in a corporate form by a great aggregation manage . 
of small investments. If, therefore, this capital ment . °f 

x capital. 

is managed, not in the interest of stockholders, 
but in the interest of officers of corporations, the whole 
community will be in danger, because the loss due to mis- 
management will fall on the rank and file of industry as 
well as upon the stockholders. The welfare and prosperity 
of the United States are intimately dependent upon wisdom 
and integrity in the management of capital. 



198 American Economic Life 

QUESTIONS FOR RECITATION 

1. Describe the life of primitive man so far as it affects the ac- 
cumulation of capital. 

2. Give some examples of modern counterparts in this respect. 

3. Why did man in his early history continually have to practice 
abstinence ? Why does he still have to ? 

4. Is it possible to satisfy all our wants? If we cannot, which 
wants should be left unsatisfied ? Why ? 

5. Explain how the habit of saving has spread. 

6. Through what modern agencies are savings capitalized? 
Explain how each operates. 

7. Why are individual savings nowadays inadequate separately 
to capitalize modern business ? What modern devices are employed 
to overcome this difficulty ? 

8. Trace the history of a ten-dollar bill after it is deposited in 
the bank. 

9. Show the part played by efficiency in the accumulation of 
capital. 

10. Upon what does the increase of capital depend? Explain 
each factor. 

11. Show why capital is either scarce or plentiful in : 

a. Mexico. c. China. e. Spain. 

b. United States. d. France. /. Holland. 

12. Name four kinds of capital; explain and give examples of 
each. 

13. Show the danger that may result from "tieing up" too much 
capital. 

14. How may capital be mismanaged? What evils may result? 
What should be the proper method of management ? 

PROBLEMS FOR DISCUSSION 

1 . What prompts the average man to save ? 

2. Wiry do Americans sometimes look down upon immigrants 
who maintain a low standard of living in order to save ? 

3. Is it better for a man to maintain a high standard of living, 
or to save by lowering his standard? What other course is open 
to him? 



The Increase of Capital 199 

4. Is the spender or the saver more advantageous to the com- 
munity ? Explain fully. 

5. Is it wise to increase the amount of capital in the United 
States? Why? 

6. Is the effective desire of accumulation stronger in Central 
or South America ? Why ? 

7. Distinguish between saving and hoarding, and the effect of 
each. 

8. Is the miser or the spendthrift the more useful member of 
society ? Why ? Who is more useful than either ? Why ? 

9. Speaking of the Galveston flood, a writer said : "Fortunately, 
such events are not unmixed evils. Employment will now be found 
for many laborers, and this benefit should not be forgotten or mini- 
mized by us." What do you think of the statement ? 

10. Is a football celebration which results in the breaking of $200 
worth of windows advantageous to the cause of labor? Apply the 
principle here involved to society in general. 

11. What would happen if there should be too much saving? 

12. Criticize the following : "Doubtless the best thing to do about 
the spendthrifts is to do nothing — not even to worry about their 
waste of money. Their waste of money, in fact, is the least silly 
thing they do, for the money is in constant flux, and serves its pur- 
pose." 

SUPPLEMENTARY READING 

Carver, T..N. Principles of Political Economy, Chap. XIII. 

Clay, H. Economics, Chap. V. 

Ely, R. T. Outlines of Economics, Chap. VIII. 

Fetter, F. A. Principles of Economics, Chaps. XX, XXII. 

Fisher, I. The Nature of Capital and Income, Chaps. V, VI. 

Marshall, A. Principles of Economics, Book IV, Chaps. VIII, IX. 

Mill, J. S. Principles of Political Economy, Chap. V. 



CHAPTER XXI 

Capital and Surplus Wealth 

I. Nature of surplus wealth 
i . Its meaning : 

a. Individual surplus 

b. Social surplus 
2 . Its causes : 

a. Cooperation : 

(i) The early method 
(2) The present method 

b. Growth of population 

c. Advance of civilization 

II. Effects of surplus wealth 

1 . When unduly centralized 

2. When widely distributed: 

a. On goods and prices 

b. On education 

c. On leisure 

d. On recreation 

e. Orf city life 
/. On capital 

3. The conclusion 

Nature of Surplus . Wealth. — Intimately connected 
with the subject of capital is the problem of surplus wealth. 

In fact, surplus wealth is the starting point of 
meaning: capital. In order that wealth may produce 
individual more wealth, part of the original wealth must 

be set aside for purposes of future production. 
The difference between the wealth produced and the wealth 



Capital and Surplus Wealth 201 

consumed is surplus wealth. All of this surplus, however, 
may not be devoted to future production. Part of it 
may later be wasted, or be finally used up in some un- 
productive manner. The residue of the surplus, which is 
actually used to assist in future production constitutes 
the fund from which capital is drawn. The individual 
surplus is that part of the total surplus which has been 
accumulated largely through the individual's own labor 
in conjunction with the other two factors of production. 
In primitive times, for example, practically all the surplus 
wealth created was an individual surplus, because land was 
largely free and whatever capital existed was extremely 
crude. But, where primitive peoples lived communistically, 
even this individual surplus was socially appropriated. 

In modern times the conditions of production have 
altogether changed. The simple relationship between 
man and nature no longer exists, and, in addi- S odal 
tion to this fact, large masses of capital are sur P lus - 
already accumulated. Men now work together in large 
groups, so that most of the wealth created can no longer 
be said to be the result of merely individual labor. Modern 
wealth is distinctly social in character ; the group, as 
a whole, plays a predominating part in its production. 
Therefore, just as primitive man by individual effort may 
produce a surplus of goods over and above what he requires 
for daily life, so society, through some form of social action, 
may produce a vast surplus of goods beyond what is needed 
for present consumption. Hence this surplus of products, 
the result of social rather than individual action, may be 
said to be a social surplus. Not all of this social surplus 
is capital, however, because only part of it may be used 
to aid in future production. 



202 American Economic Life 

In the creation of surplus wealth society plays its part 
either through cooperation, or through the growth of 
its causes: population, or through the general advance of 
Cooperation.^ civilization. In the first place surplus wealth 
is the result of cooperation. Men working together can 
produce vastly more than men working singly. An 
example of this may be seen in the production of any 
ordinary commodity, such as nails. Formerly, each nail 
was hammered out on an anvil by the strong arm of an 
artisan ; now, a long wire runs into one end of a machine 
and comes out of the other in the form of a finished nail. 
This change in method has had a marvelous effect on the 
output. Fifty years ago one man might hammer out a 
hundred nails an hour ; to-day, by changing the method 
of production, a swift-moving machine produces thousands 
of nails in the same time. 

This change in method is based on cooperation. Men 
work together in groups and then these groups work to- 
gether. One set of men make iron ore into steel ; another 
set make iron and steel into the nail-making machine ; 
another make the belts, the screws, and the gears ; still 
another transport these products to one central place, the 
factory ; and now, all being ready and a million hands 
having assisted in bringing the steel wire and the machine 
together, the machine produces a flood of nails which 
find their way into the home, the office, and the factory. 
All this has been accomplished because of the principle of 
cooperation, which asserts that two men working together 
can produce more than twice as much as each man working 
separately. 

In the second place, surplus wealth results from an in- 
crease in value brought about by social action in the form 



Capital and Surplus Wealth 203 

of the growth of population. This is clearly seen in the 
case of land values. The value of land rises with the 
growth of population and the consequent demand Growth of 
for land and its products. The lot in the heart Population. 
of a populous city, or the fertile farm feeding a growing 
population, is many times more valuable to-day than a 
hundred years ago. This increase in value has been 
brought about, not by any one individual,- but by collective 
action of the whole- social group. Therefore, increased 
land values, not due to individual improvements but result- 
ing from social activity, are social values and constitute a 
part of the surplus wealth of society. While, under our 
present system, they may enrich the individual owners, 
they are, nevertheless, created by society. 

Finally, surplus wealth is due to advancing civilization. 
No invention is the work of one man, but the final triumph 
of a long line of preceding inventions. Pro- Advance of 
cesses, systems of work, railroads, streets, — avihzaHon. 
in fact the whole fabric of society, — are begun by one 
generation and handed on to the next. Thus each suc- 
ceeding generation enjoys the benefit of surplus wealth 
previously created. Adding its own contribution to 
this heritage, it then passes the fabric on to its successor. 
In this manner future generations, securing vast returns 
from a system to which they contributed nothing, enjoy 
great quantities of surplus wealth. 

Effects of Surplus Wealth. — Society has thus come to 
possess a vast amount of surplus wealth over and above 
the actual requirements of present consumption. 
When we consider the United States alone, the unduly cen- 
extent of this surplus is valued in billions of tralized - 
dollars. The period following the Civil War was one of 



204 American Economic Life 

marvelous industrial expansion, which culminated in the 
abundant national prosperity of the late nineteenth cen- 
tury. This, of course, was brought about by individual as 
well as group action ; but the social factors of cooperation, 
growth of population, improved processes of production, 
and perfected organization of industry played the domi- 
nating part in the creation of this surplus wealth. The 
tendency, however, of this surplus was to become rela- 
tively centralized in the hands of a small group of people 
who thus exercised great economic and political power 
over the community. The advantages that might have 
accrued to the community, through this great increase in 
wealth, were therefore largely confined to the small group 
controlling the surplus. 

When this surplus is widely distributed throughout 
society, the effects are entirely advantageous to the com- 
When munity. The most direct effect of this surplus, 

Sbuted d ! S " if it: could be legitimately diffused throughout 
On goods American society, would be seen in the quality, 
and prices. q Ua ntity, and prices of goods consumed by the 
people. A better grade of goods would be produced in 
larger quantities at cheaper prices. For example, the 
natural effect of an improved process of making shoes 
should be to increase the output and to lower the price of 
shoes to the advantage of all who wear them. This 
process of bettering quality, increasing amount, and 
decreasing price should continue until every member of 
the community has an opportunity to secure enough 
economic goods to maintain an efficient standard of living. 

The surplus wealth of society may also make itself 
felt in other less direct ways. For example, when there 
is a great mass of social wealth in a community, society 



Capital and Surplus Wealth 205 

may offer opportunities for individual improvement other- 
wise unattainable. In our large cities this advantage is 
frequently seen in the great number of publicly on 
or privately endowed lecture halls, libraries, education. 
museums, schools, and colleges, which open to the average 
man and woman lines of work hitherto unattainable. 

Likewise, the surplus makes possible wide opportunities 
for leisure and recreation. In modern life leisure is essen- 
tial. Leisure does not mean idleness, but time 0n 
in which men are free to do as they desire. The letsure - 
nail machine has its advantage in increased output ; its 
disadvantage, in monotony and sameness. Since his work 
is largely mechanical, the man who tends this machine 
learns very little. Therefore, if such a man is to live a full, 
rounded life, he must have leisure, — free time in which to 
walk and read and think. 

Through the shorter working day, surplus wealth makes 
leisure possible. Surplus wealth results in surplus time. 
Part of this time should be devoted to recrea- 0n 
tion, — to activities of a relaxing nature which rec ^ eation - 
require neither concentrated thought nor monotonous 
movement. In the country, recreation is easily had ; but 
in the city, opportunities for recreation, unless created in 
the form of parks and playgrounds, are extremely limited. 
Therefore, the surplus wealth of society should provide 
the community with opportunities which will prove ade- 
quate substitutes for the lost recreation facilities of country 
and village life. 

It is evident, therefore, that this surplus should have 
a decided effect upon the conditions of city life. This 
wealth of society should be diverted into various channels. 
Not only should recreation facilities be provided, but the 



2o6 American Economic Life 

city should be made beautiful. In this respect, America 
has much to learn from Europe. Public architecture 
o n city should be of the finest character. Streets 

li f e - should be widened, trees planted, symmetry in 

architecture maintained, and every effort made to beautify 
the city. 

Finally, surplus wealth, when widely distributed, will 
have a marked effect upon the increase of capital. We have 
0n seen that surplus wealth is the starting point 

capital. f capital. In early days, when wealth was 

scarce, this starting point was difficult of attainment. 
The hard-fisted man was in great demand because it was only 
through stinting and close living that capital was amassed. 
But with the growth of surplus wealth, man need not 
necessarily lower his standard of living in order to create 
a fund of capital. In fact, the more man consumes wisely, 
the greater will be his productive power. Through in- 
creased consumption, made possible by surplus wealth, 
man will increase his efficiency and, thereby, add his 
quota to the surplus wealth from which capital is drawn. 
Thus, surplus wealth, by decreasing the necessity for ab- 
stinence, will cause men to realize more and more that 
efficiency, not parsimony, is the key to individual as 
well as social welfare. 

When we realize the benefits to society that accrue from 
a wide distribution of its surplus wealth, it becomes im- 
The portant to inquire whether, with justice to all 

conclusion, individuals, this surplus may not be more 
generally diffused throughout the community. Without 
disturbing the right of private property and the correspond- 
ing right of the individual to amass a large fortune, is it 
not possible for wealth that is distinctly social in character 



Capital and Surplus Wealth 207 

to be partially shared, through some legitimate method, 
by all members of the community. For example, this 
diffusion of surplus wealth has already been partly accom- 
plished by philanthropists, who voluntarily return to the 
community its wealth in the form of libraries, universities, 
and other public institutions. Again, far-seeing employers 
distribute this wealth among the workers in the form of 
higher wages and greater participation in profits. In 
addition to these voluntary methods of sharing surplus 
wealth, there are also other means of distributing the 
surplus through the demands of labor organizations and 
through changes in our system of wealth distribution. 
But by far the simplest method of sharing this surplus is 
accomplished through taxation. The income tax and the 
inheritance tax constitute two effective means of returning 
to society the wealth that social action has been largely 
instrumental in creating. 

QUESTIONS FOR RECITATION 

1. Define surplus wealth. Give examples. 

2. Explain the difference between individual surplus and social 
surplus. 

3. What change in methods of production has made surplus 
wealth possible ? Show how the new method differs from the old. 

4. What are two other causes of surplus wealth? Explain the 
part played by each. 

5. Explain the effects of surplus wealth when it is highly cen- 
tralized in the hands of a comparatively few individuals. 

6. Explain the effects of surplus wealth when it is widely dis- 
tributed throughout the community. 

7. Explain how philanthropists return surplus wealth to the 
community. 

8. How do far-seeing employers handle the problem of surplus 
wealth ? 



208 American Economic Life 

9. Explain clearly how this surplus may be returned to the 
community through taxation. 

10. Mention some more radical measures of distributing surplus 
wealth. Show the objections to these measures. 

PROBLEMS FOR DISCUSSION 

1. What are "socially created values"? 

2. What relation exists between cooperation and surplus wealth? 

3. Explain why cooperation can accomplish more than indi- 
vidual action. 

4. What factors lead men to cooperate ? 

5. What may surplus wealth mean to the individual? To 
society ? 

6. What is the relation between population growth and the social 
surplus ? 

7. How may the surplus affect prices ? Production? 

8. What relation does surplus wealth bear to education? Lei- 
sure ? Recreation ? City life ? 

9. Why was the old concept of saving absolutely necessary? 

10. How is this concept altered by the presence of large surplus 
wealth ? 

SUPPLEMENTARY READING 

George, H. Progress and Poverty. 

Hobson, J. A. The Evolution of Modern Capitalism. 

Patten, S. N. Dynamic Economics. 

Patten, S. N. Product and Climax. 

Seligman,.E. R. A. The Income Tax. 

Smart, W. The Distribution of Income. 

West, M. The Inheritance Tax. 



CHAPTER XXII 

American Agriculture 

I. Its early development 
i. In the North 

2. In the South: 

a. The agricultural conditions 

b. The effect of the cotton gin 

3. In the West: 

a. Effect of steam engine 

b. Effect of public land policy 

4. Importance of machinery : 

a. Early agricultural methods 

b. Modern improvements 

5. The final result 

II. Its present status 

1. Importance of agriculture 

2. Kinds of agriculture : 

a. General farming 

b. Production of cereals 

c. Stock raising 

d. Dairying 

e. Fruit growing 

/. Market gardening 

3. Agricultural training 

We have now examined the parts played by land, labor, 
and capital in the production of wealth. We have seen 
that in all three of these respects the United States is un- 
usually fortunate. So far as the requisites of production 
are concerned, national prosperity and individual welfare 

209 



210 American Economic Life 

are attainable in America. What use, then, has the United 
States made of these abundant resources of land, labor, 
and capital? Has the nation neglected its opportunities, 
or has it developed a system of wealth production in 
keeping with its natural possibilities? This question 
may best be answered by an examination of the progress 
attained in American economic life along the lines of agri- 
culture, industry, and transportation. 

Early Development of Agriculture. — In a previous 
chapter the fundamental physical differences between 
in the the North and the South were indicated. The 

North. Northern environment, with its thin soil, 

mineral deposits, and cold climate, made an industrial 
society inevitable. The Northern colonists turned nat- 
urally to lumbering, fishing, commerce, and later to 
mining and manufacturing. But even here, from the 
earliest days, agriculture was also developed, furnishing 
the colonists with grain, live stock, fruit, and general farm 
products. 

The South, however, was the natural home of agriculture. 

Its genial climate and fertile soil led the early colonists to 

disregard their industrial possibilities and turn 

South: The their attention to the cultivation of tobacco, 

agricultural r i ce m( tfg anc [ co tton. The institution of 

conditions. ° ' 

slavery also fostered this agricultural develop- 
ment, and, in turn, was made profitable by it. While 
slave labor, because of its lack of intelligence, was not 
particularly suited to the growing of tobacco, it was never- 
theless well adapted to the cultivation of rice, because in 
the rice swamps slave labor could be readily worked in 
gangs. 

In the cultivation of cotton, however, slavery received 



American Agriculture 211 

its real impetus. In 1793 Whitney's cotton gin made 
possible a mechanical separation of the cotton seed from 
the fiber. This device brought about the growth E ^ ect j 
and manufacture of cotton on a large scale. cotton gin - 
Cotton cloth ceased to be expensive because the gin 
cleaned as much cotton in a day as had been cleaned for- 
merly by hundreds of slaves. In this manner, cotton 
became the most profitable crop of the Southern planter 
because it could be grown by slaves managed on the gang 
system. The planters increased the size of their plan- 
tations, added to the number of their slaves, and extended 
the cultivation of the cotton crop from Cape Hatteras to 
Texas. The South had crowned her king. 

Meanwhile, a parallel agricultural movement was pro- 
gressing in the West. From the opening of the Northwest 
Territory to the settlement of Washington and 
Oregon, the land west of the Allegheny Moun- E ^ ect * 
tains was transformed from a wilderness into an steam 

-r -i e engine. 

agricultural region. In the early part of the 
nineteenth century, because of the impossibility of trans- 
porting grain other than by boat, settlements could be 
made only along the rivers. But, with the advent of the 
steam engine, land transportation of bulky freight became 
possible and the West was peopled and developed with 
lightning rapidity. 

Another important' factor in the development of the 
West was the ease with which public lands were secured. 
The Federal government, abandoning the attempt ff , 
to amass revenue from the sale of these lands, public land 
made every effort to induce their settlement ° uy ' 
and cultivation. As a result of this policy, the pioneers 
pushed from the Northwest Territory into " Louisiana," 



212 American Economic Life 

" Oregon," " California," and " Texas." They cleared 
the wilderness, sold their claims, and then moved on to the 
next bit of wild land. In this way, the great acquisitions 
of territory were brought, one by one, under human control 
and made an integral part of the agricultural wealth of 
the nation. 

No factor has been of greater importance in the general 
development of American agriculture than the use of 
importance machinery. At the beginning of the nineteenth 
of ma- century, the farming of the nation was done with 

„ , . tools little better than those used by the Romans 

Early agri- # J 

cultural in the days of Julius Caesar. Horses were 
scarce ; oxen, expensive. The land was broken 
up, and crops sown, cultivated, and harvested chiefly by 
hand power. But this kind of labor was slow and costly, 
and Yankee ingenuity was called upon to devise labor- 
saving appliances. As a result, machinery, for the first 
time in human history, came to play a leading role in the 
development of agriculture. 

The first successful agricultural machinery in America 
was built during the second quarter of the nineteenth 
Modem im- century, and was perfected toward the close of 
provements. tne ce ntury. The land is now plowed by a 
horse plow or steam plow; the grain is sown by a drill 
which not only spreads the fertilizer but covers the seed; 
the crop is cultivated and the harvest reaped by machines 
especially designed for the work. The country boy need 
no longer leave the back-breaking toil of the farm for the 
stifling air of the factory. The factory, in the form of 
modern machinery, has come to the farm and makes 
bearable the life of the agricultural laborer. 

Based on science and bulwarked by mechanical appli- 



American Agriculture 213 

ances, American agriculture has developed rapidly during 
the nineteenth and twentieth centuries. The South raises 
cotton, tobacco, rice, sugar, fruit, and vegeta- The final 
bles ; the West, grain, fruit, and cattle ; while result - 
the East is devoted to general farming and dairying prod- 
ucts. In three hundred years American agriculture has 
grown from infancy to splendid maturity. 

Present Status of Agriculture. — The United States 
to-day occupies a premier position in the field of agri- 
culture. Since the close of the nineteenth cen- itsimpor- 
tury, the total farm output of the country has tance - 
steadily increased until, during the World War, it reached 
an estimated value of twenty billions of dollars. No 
other products compare with these in value, and there is 
no other single group of industries including such a large 
proportion of workers. The dependence of labor on 
agriculture is attested by the fact that, in normal times, 
one-third of all the labor employed in gainful occupations 
in the United States is engaged in some form of agricultural 
pursuit. A shortage of labor in this field is fraught with 
more danger to national life than in any other. 

For convenience of discussion this occupation may 
be divided into the following lines of work: Kinds of 
(1) general farming; (2) production of cereals; agriculture: 
(3) stock raising ; (4) dairying ; (5) fruit growing ; and 
(6) market gardening. 

General farming is an occupation usually associated with 
the word " farmer." The general farmer raises live stock, 
has a small dairy, keeps chickens and pigs, raises General 
some fruit, and, if near a market, grows a small f armin s- 
amount of garden produce. As " jack of all trades and 
master of none," he sometimes fails to produce large or 



214 American Economic Life 

valuable returns. For this reason the general farm is 
gradually giving way to some more specialized form of 
agricultural work. 

Of these specialized agricultural pursuits, the production 
of cereals is by far the most important. These include 
Production corn, wheat, oats, barley, rye, rice, and buck- 
of cereals. wheat. Of these the most important are corn 
and wheat. The United States produces twice as much 
corn as all the rest of the world put together. Its region of 
greatest production stretches from Ohio to Kansas, and 
from Kentucky to Wisconsin, although it is grown in the 
whole area from the Gulf of Mexico to the Great Lakes 
and from the Atlantic Ocean to western Kansas. While 
wheat may be generally grown in various parts of the United 
States, its area of greatest production is found in the upper 
Mississippi Valley, in the Middle West, and in Washington 
and Oregon on the Pacific Coast. The belt of greatest 
importance stretches from Texas north through Oklahoma, 
Kansas, Nebraska, the Dakotas, and Minnesota into 
Canada. The World War stimulated enormously our 
production of both wheat and corn, and, by causing us to 
send vast shipments of wheat abroad, taught us the value 
of corn for table purposes. 

Stock raising is an industry largely confined to the middle 
Southwest. Cattle are raised on the ranches of Arizona, 
stock transported to Kansas, and there fattened on 

raising. fae corn lands. Then they are taken to St. 
Louis, Omaha, or Chicago, where they are slaughtered, 
converted into various packing-house products, and 
shipped finally to all parts of the world. On the Kansas 
farms, hogs also are fed with the cattle, fattened on the 
corn, and then shipped to the packing houses. 



American Agriculture 215 

Dairying, which sometimes accompanies stock raising, is 
usually confined to the neighborhood of great cities. The 
necessity of producing dairy products within 
easy reach of the city is particularly seen in the 
case of milk, since milk cannot be transported properly for 
a greater distance than one hundred miles. Butter, how- 
ever, is transported from the Middle West to all parts of 
the country. 

Western fruit growing was originally developed to fur- 
nish return freight for the emptied refrigerator cars. The 
great packing houses in the Middle West, ship- Fru u 
ping their products in cars to the Pacific Coast, srawing. 
were unable at first to secure for them any suitable return 
cargo. However, they soon discovered that this coast 
was peculiarly suited to the growing of showy fruit. Thus 
an industry was developed which provided the empty meat 
cars with a splendidly paying return shipment. Then, too, 
apples and Tokay grapes proved to be good paying crops 
and were rapidly introduced from Oregon and Southern 
California. Fruit has, of course, always been grown on a 
small scale in all agricultural districts. 

Market gardening has developed at a phenomenal rate 
during the past thirty years. Originally, farmers grew 
their products and hauled them in wagons to Market 
the near-by towns. Now, spinach, lettuce, sardening. 
tomatoes, and other green vegetables are grown in the 
Southern states all winter long and shipped by fast freight 
to the North. These products not only bring reasonable 
prices to Southern farmers, but they provide city con- 
sumers with green vegetables throughout the whole year. 
Meanwhile, hothouses have been constructed in the North 
in which lettuce, tomatoes, cucumbers, beans, and other 



216 American Economic Life 

green products are grown with considerable profit. The 
rapid increase of city population has thus been followed 
by the development, all along the Atlantic seaboard, of 
market gardening on a large scale. 

During the last half century the American people have 
developed and perfected so many new agricultural methods 
Agricultural that agriculture itself has been placed on the 
training. basis of modern industry. In bringing about 
this result, the agricultural school has played an important 
part. Formerly, the farmer was an untrained man. The 
knowledge he possessed was inadequate and traditional. 
To-day, however, on the farms of the Middle and Far West 
there are many thousands of men who have taken technical 
courses in agriculture. These men are trained in the 
modern science which has revolutionized agriculture as 
well as industry, and are equipped with a knowledge of 
business methods. Upon men of this character depends 
our future agricultural progress. 

QUESTIONS FOR RECITATION 

i. Explain why the North is not preeminently agricultural. 
Why it is preeminently industrial. 

2. What does the South produce? Why? 

3. Why was slavery profitable in the South, but not in the 
North? 

4. Why did not the cotton gin decrease the need for slave labor? 

5. What factors developed agriculture in the West? Explain 
each. 

6. Explain early methods of agriculture in the United States. 

7. Show the importance of modern agricultural machinery. 

8. Name the chief products of the East, South, and West. 

9. Why is agriculture a basic industry? 

10. Name the chief kinds of agricultural work in the United 
States. Explain what you mean by each. 



American Agriculture 217 

11. Why is the general farmer turning more of his attention to 
specialties ? 

12. Name the chief areas of corn and wheat production in the 
United States. 

13. What parts of the country are most interested in stock rais- 
ing? 

14. Where is the center of dairying? Of fruit growing? Of 
market gardening ? 

15. Why is agricultural training important? 

PROBLEMS FOR DISCUSSION 

1. What causes make it possible for the percentage of our popu- 
lation engaged in agriculture to decrease ? 

2. Why have many people left the farms for other pursuits? 
Is this migration likely to continue ? 

3. Agricultural experts tell us that by using present amounts 
of labor, land, and capital according to the most effective plans of 
agricultural production already known, the productive efficiency 
in this industry could be doubled in a year. Why is this not done ? 
What forces are working in this direction? 

4. Why should the forces of custom, habit, and inertia be stronger 
in agriculture than in other pursuits ? 

5. What functions do you think the agricultural colleges per- 
form? 

6. When good means of transportation opened up markets for 
the produce of the Western pioneers, what changes took place in 
agricultural production? 

7. Under what conditions are we apt to have diversified farm- 
ing? Single-crop farming? 

8. What is the difference between extensive and intensive agri- 
culture ? 

9. Why is agriculture in Europe more intensive than in the 
United States? 

10. If you were to take up agriculture as a profession, what 
branch would you select ? Why ? 

11. What was the effect of the World War upon our agricultural 
development ? 



218 American Economic Life 

12. What danger did agriculture face when this war was over? 

13. Is agriculture to-day yielding a diminishing return? 



SUPPLEMENTARY READING 

Bulletins. United States Department of Agriculture. 
Bulletins. State Agricultural Departments. 

Harwood, W. S. The New Earth, Chaps. IX, XT, XII, XIX, XX. 
Smith, J. R. Commerce and Industry, Chap. I. 

Warren, G. F. Elements of Agriculture, Chaps. VII, XVI, XVII, 
XVIII. 



CHAPTER XXIII 

The Problem of Soil Fertility 

I. How the soil is exhausted 
i. Why fertility is important 

2. Causes of soil exhaustion : 

a. The "one crop" system : 
(i) Examples 

(2) Evil results 

b. Lack of "humus" 

c. Waste of manure : 

(1) Examples 

(2) The estimated loss 

3. The result 

II. How fertility may be restored 

1. The essential elements 

2. Means of soil conservation : 

a. The fertilizers : 

(1) Chemical fertilizers 

(2) Animal products 

(3) Barnyard manure 

b. Cover crops : 

(1) Their meaning 

(2) Their purpose 

(3) Value of "legumes" 
3. The outlook 

How the Soil is Exhausted. — Intimately connected 
with the subject of agriculture is the problem of soil 
fertility. We have seen that land is inherently subject to 
the law of diminishing returns, and that, consequently, 
the longer the soil is worked the less is likely to be its 

219 



220 American Economic Life 

fertility. Hence the question of maintaining the produc- 
tivity of the soil becomes of paramount importance. Man 
w must combat the tendency of land to yield a de- 

fertiiity is creasing return. But, in spite of this necessity, 
impor an . j^g attention has been given, until recently, 
to the conservation of soil fertility in the United States. 
In this country rich soil has been so abundant that man, 
rather than spend time and effort upon the conservation 
of a particular soil, has simply moved from land of diminish- 
ing fertility to one of increasing return. 

Through carelessness or ignorance, the American farmer 

has often unnecessarily exhausted the fertility of the soil. 

. This exhaustion has resulted chiefly from the 

Causes of ' 

soil ex- " one crop " system, from the lack of " humus," 
haustion: ^ ^ om ^ waste of manure. The one crop 

The' 1 one . 

crop " system, used for years in the South, is disastrous 

system. tQ soil fertility. There, the same piece of land, 

year after year, was used for growing tobacco or cotton, 
and, when the planter began to notice a decreased return, 
he simply moved to another fertile spot which he likewise 
devoted to the exclusive production of one crop. If, 
instead of confining his production to this crop, the farmer 
had practiced scientific rotation of crops, the soil might 
have retained its fertility almost indefinitely. 

The one crop system has two evil results. In the first 
place, it causes the soil to be exhausted of that particular 
element required to grow the special crop, so that even- 
tually the cultivation of the crop on that land will have 
to be abandoned. In the second place, the insect enemies 
and bacteria, which prey upon that crop, will multiply to 
an alarming extent and ultimately prove disastrous to its 
cultivation. 



The Problem of Soil Fertility 221 

Again, soil exhaustion has resulted from the lack of 
" humus." Humus is decayed organic matter. It is 
essential to fertility because it loosens the soil, Lack of 
permits the entrance of air and sunlight, holds " humus " 
moisture, and finally furnishes food elements for plant 
growth. This humus has been provided by nature through 
the leaves of trees and other natural products. By cutting 
down trees and destroying plant life, man has often removed 
the source of humus. 

Another reason for soil exhaustion is found in the waste 
or disuse of manure. Sometimes, when manure piles 
become so large as to be in the way, a farmer waste of 
simply removes his barn, the thought of using manure - 
the manure as fertilizer never entering his head. In the 
abandoned farms of New England, we find a less ex- 
treme but, unfortunately, more general instance of the 
failure to utilize manure properly. For generations, 
the New England farmer planted his crops, — hay and 
grain, — cut them, fed part of them to his cattle and horses, 
and shipped the remainder to town. The part which he 
fed to his stock was returned to the land in the form of 
stable manure. But this manure, while piled up in the 
barnyard for several months of the year, was depleted of 
its liquid portion and of that portion which leached out. 
Thus the farmer each year returned to the soil less than 
he had taken from it. 

Some idea of the loss entailed by this waste may be 
gained from an estimate made by the United States 
Department of Agriculture. This department estimated 
that $250,000,000 represented the annual loss resulting 
from the failure to utilize manure efficiently. This loss 
might be prevented simply by conducting the liquid to 



222 American Economic Life 

cement pits on cement floors, instead of permitting it to 
run off into the barnyard. 

As a result of this carelessness orlgnorance of the Amer- 
ican farmer, the soil of the United States, in certain sections 
of the country, is being unnecessarily exhausted 

The result. . J . . . . 

of its natural fertility. This exhaustion has 
been taking place rather rapidly in the plantations of the 
South, and more slowly in the farms of New England. To- 
day, as evidence of this, great stretches of land lie unused 
in both districts. In these regions, therefore, the law of 
diminishing returns from land has been in actual operation, 
simply because man has not cultivated the soil in accord- 
ance with the principles of scientific farming. 

How Fertility May Be Restored. — In addition to the 
practice of scientific farming and the proper maintenance 

of humus, soil fertility depends chiefly upon 

1116 CSS6IX- 

tial ele- the presence of three chemical elements, — 
nitrogen, phosphorus, and potassium. Of these 
three elements, potassium, which is found generally in clay 
soils, is most easily obtained. Nitrogen is secured chiefly 
through ammonium compounds, while phosphorus exists 
in bone meal, guano, and phosphate rock. The mainte- 
nance of soil conservation depends, therefore, largely upon 
the presence of these three elements in the soil. 

To maintain these essentials either chemical fertilizers, 
animal substances, or barnyard manure may be applied 
Means of to the soil ; or green cover crops may be plowed 
soil con- under to act as fertilizer. Chemical fertilizers, 

servation : 7 

Theferti- sucn as nitrate of soda, muriate of potash, and 
lizers. ac jj phosphate, furnish the needed chemical 

elements without providing the required humus for the soil. 
On the other hand, fertilizers which are animal products, 



The Problem of Soil Fertility 223 

like ground fish and dried blood, do contain organic matter 
which decays in the soil. Of especial value, however, are 
stable manure and green crops used as fertilizers. These 
possess not only chemical elements, but are particularly 
valuable for their humus. While stable manure is very 
effective, its high price may prevent its use from becoming 
general. 

On the other hand, green or cover crops are cheap and 
equally effective. A cover crop is a crop sown with the 
avowed purpose of plowing it under when it 

Cover crops. 

reaches the proper stage, the farmer sows 
this crop in the late fall and lets it cover the ground all 
winter, because he knows that something is bound to 
grow on his land during the late fall and early spring. He 
prefers to have a crop which he may use for purposes of 
fertilization, rather than a mass of weeds which will stand 
in the way of cultivation. Then too, in midsummer, 
when he ceases to cultivate corn, the wise farmer, instead 
of allowing weeds to grow unchecked, plants a cover crop 
between the rows of corn. These crops not only protect 
the ground from the fierce rays of the sun and thus help it 
to hold moisture, but they also develop a good growth of 
stalks and leaves that will prove invaluable as green manure 
when they are plowed down and left to rot. 

Of these cover crops the most valuable are " legumes," 
— peas, beans, clover, vetch, rape, and alfalfa, ■ — on the 
roots of which appear small bulbous formations containing 
ammonium compounds from which nitrogen is derived. 
These nodules are the product of bacteria which turn air 
nitrogen into soil nitrogen. Through few, if any, other 
plants can the free nitrogen of the air be converted into 
nitrogen that may be utilized by plants themselves. These 



224 American Economic Life 

legumes, therefore, not only furnish splendid stalks and 
leaf growths for humus, but, in addition, fix that most 
expensive of the fertility elements, nitrogen. 

Thus it may be seen that, in America, the problem of soil 
fertility is not difhcuit of solution. While it is true that 
The out- many sections of the country, through ignorance 
look. or carelessness, have suffered the effects of soil 

exhaustion, it is equally true that these same regions, by 
wise care and management, may be restored to their 
former fertility. It is likewise evident that there is no 
necessity whatsoever for the soil enjoying present fertility 
to be exhausted of its fertile qualities. Scientific farming, 
good judgment, and increased knowledge are the factors 
essential to a successful solution of the problem. The 
agricultural school to-day attempts to supply the farming 
population with this increased knowledge. 

QUESTIONS FOR RECITATION 

i. Why is the question of soil fertility becoming increasingly 
important ? 

2. Can you give any examples of the one-crop system in the 
United States to-day? State its evil effects. 

3. What is humus? What are its uses? 

4. Explain how manure is wasted. 

5. By what methods may manure be more effectively used? 

6. What are the results of soil exhaustion ? 

7. Upon what chemical elements does soil fertility depend? 
State where each is found. 

8. Name some animal products that are good fertilizers. 

9. Why are manure and cover crops especially valuable as 
fertilizers ? 

10. What are cover crops ? When and why are they planted ? 

11. Name the legumes. Explain their value to the farmer. 

12. What is meant by "scientific farming"? 



The Problem of Soil Fertility 225 



PROBLEMS FOR DISCUSSION 

1. Contrast the soil of the United States to-day with the condi- 
tion of the soil in the early nineteenth century. 

2. What does soil exhaustion involve ? 

3. Discuss the remedies for soil exhaustion. 

4. Explain the principle of rotation of crops. 

5. Describe the means that nature provides for the maintenance 
of humus in the soil. 

6. How have men thwarted nature's means of humus conser- 
vation ? 

7. Describe an abandoned farm and explain fully how you would 
restore its fertility. 

8. What does your own state do to maintain or improve its 
soil fertility ? 

9. What does the United States do in this direction? 

10. Contrast the care taken of the soil in this country with the 
work in this direction in France or Holland. 

11. To what extent would you say the law of diminishing returns 
is at work in the United States ? Explain fully. 

12. Is this tendency likely to increase or decrease in this country? 
Why? 

SUPPLEMENTARY READING 

Annals American Academy. Conservation of Natural Resources, 

Parts III and IV. 
Hall, B. A Little Land and a Living. 

Harwood, W. S. The New Earth, Chaps. I, II, III, V, XVIII. 
Hunt, T. F. How to Choose a Farm. 
Warren, G. F. Elements of Agriculture, Chaps. IV, V, VI, IX. 



CHAPTER XXIV 

New Forms oe Plant and Animal Life 

I. The process of selection 
i. Artificial selection : 

a. Meaning and example 

b. How accomplished 

2. Natural selection : 

a. Meaning and example 

b. The final result 

3. A fundamental difference 

II. How man utilizes selection 

1 . In changing animal life : 

a. The transformed hog 

b. Different types of horses 

c. The modern hen 

2. In changing vegetable life : 

a. The new variety of wheat 

b. New varieties of corn 

c. New fruits and vegetables 

3. The conclusion 

Another problem connected with agriculture is that 
furnished by the conscious production of new forms of plant 
and animal life. Formerly, such a change in the natural 
order would have been regarded as' evidence of witchcraft, 
and the person possessed of this power promptly burned 
at the stake. To-day, however, this is rightly regarded as 
one of the triumphs of modern agriculture. 

226 



New Forms of Plant and Animal Life 227 

The Process of Selection. — Selection is either artificial 
or natural. Artificial selection is the process by which men 
perpetuate or destroy certain desirable or un- 
desirable characteristics in animals and plants, section: 
For example, the cat, belonging to one of the Meaning 

and 
example. 



most ferocious families in the animal kingdom, ° 



was originally fierce and wild. To-day, it is so 

gentle and quiet that it loves to be played with and caressed. 

It has, indeed, become the plaything of children. 

How has this wonderful transformation been accom- 
plished? Simply by a process of artificial selection. For 
centuries, man has not permitted any but the How ac- 
gentlest cats to live. In this manner, the ^mpiished. 
quiet and docile cats, generation after generation, trans- 
mitted their gentle characteristics to their kittens, until 
to-day we have the domestic pet at our fireside. By a 
similar process other domestic animals were transformed 
from wild into tame creatures. Man selected in the parents 
those qualities he desired in the offspring, and thus deter- 
mined the character of the coming generation. 

In natural selection man plays no part. Natural con- 
ditions determine those that are to survive, and their 
qualities are thus transmitted to their off- Natural 
spring. For example, in the wilds of India, selectlon: 
ferocity is essential to the cat family. Survival J^" 
depends on this quality. Hence, the ferocious exam P le - 
tiger survives, while the less ferocious is easily killed or 
starves to death. In this manner a rigorous process of 
natural selection destroys the gentle and perpetuates the 
fierce qualities required in the tiger. 

By the process of natural selection, those forms of life 
best able to escape enemies in their particular locality 



228 American Economic Life 

adapt themselves to it, and survive. But thousands 
of others, not so well adapted to their environment, are 
The final killed in their struggle for existence. A good 
result. sized cod lays from thirty to fifty millions of eggs, 

but only a few of those that are hatched ever survive to 
adult life. The remainder are destroyed by the cod's 
enemies either before or after hatching. Thus, in the 
course of centuries, this " survival of the fittest " produces 
a creature best adapted to its own environment. 

Natural and artificial selection differ in one fundamental 
respect. The former is unconscious ; the latter, con- 
Afunda- scious and deliberate. Natural selection occurs 
mental unknowingly, without the intervention of any 

conscious will, while artificial selection takes 
place with a deliberate end in view. The cod's young. are 
accidentally destroyed by their hungry enemies who have 
no thought of developing a strong type of codfish. On the 
other hand, the fierce, wild cats are deliberately killed by 
man in order to produce a quiet, gentle type of cat. 

How Man Utilizes Selection. — Through artificial selec- 
tion men have changed, and are still changing, various 
forms of life coming within their power. This 
life: may be seen both in the animal and vegetable 

The trans- world. Southdown sheep and the two-minute 

formed hog. ._.,,. . 

trotter are products of artificial selection just 
as much as the thornless cactus and the Burbank potato. 
In fact, artificial selection has revolutionized animal life. 
A striking instance of this is seen in the transformation of 
the hog. The wild mountain hog, with his sharp back, 
raw-boned body, and long legs, was little suited to the 
pork market. The hog breeder, therefore, proceeded to 
change this scrawny, razorback creature into a fat, edible 



New Forms of Plant and Animal Life 229 

animal. This he did by selecting from each generation 
the short-legged, fat, quiet hogs to be the parents of the 
next generation. In this manner, after the process had 
continued many years, a type of hog satisfying all the 
requirements of the market was produced. 

With, horses this same process of selection has been 
carried on. Some horses must be fast, others suited to 
light work, and still others capable of drawing 
the heaviest loads. In response to these types of 
demands, horse breeders, by proper mating, 
have finally developed fast race horses, all-around work 
horses, and draught horses of great bulk and strength. 

Chickens have likewise been transformed. The hen, in 
her wild state, laid a few eggs a year and hatched them 
all. The modern hen — the product of careful T h e mo dem 
artificial selection — lays ten times as many hen - 
eggs in the course of a year and may even be induced to 
refrain from setting. The value of this increased egg 
supply is obvious. While the cost of raising chickens 
remains the same, the additional eggs furnish the farmer 
with increased profits. 

Recently, however, the most remarkable results from 
artificial selection have been attained in the development 
of vegetable rather than of animal species, invege- 
Students of plant life, during the later nineteenth table Ufe: 
century, created many new vegetable types. mr iety of 
Consider, for example, the work of the govern- wheaL 
ment experiment stations in developing a new variety of 
cereal capable of resisting disease. The gravest foes of the 
farmer during late years have been blight, scale, and 
similar forms of plant disease. An attempt was therefore 
made to develop a species of wheat that would not succumb 



230 American Economic Life 

to blight. Experiment after experiment was made with 
this end in view, and men were sent all over the world 
to look for kinds of wheat that would resist blight. Such 
a type of wheat was finally evolved. At the same time, 
experiments were being made on the dry lands of the West, 
where the rainfall is only one-third of that along the Atlantic 
plains. Here, the land being fertile and the water scarce, 
a kind of wheat capable of resisting drought was produced. 
Eventually, by careful selection, there was further developed 
a variety of wheat not only requiring little moisture, but 
also comparatively free from blight. 

The corn belt in the Middle West furnishes another 

interesting example of the results of selection. The 

manufacturers of corn oil desired a corn con- 

New 

varieties taining a high percentage of oil, while the manu- 
corn " factures of certain corn food found a low per- 

centage of oil desirable. To meet these different demands, 
experiments were made on a certain variety of corn con- 
taining six per cent of oil. As a result, this same corn in 
the course of a few years was made to produce one variety 
containing nine per cent of oil, and another containing two 
per cent of oil. 

In the same manner the principle of artificial selection 
has been utilized to produce new kinds of fruits and vege- 
New fruits ta bl es - Burbank displaced the red potato by 
and the artificial white one, and thus realized the 

picture of a potato he mentally patterned in 
1873, — "A potato with a better flavor, one with a rela- 
tively larger amount of sugar, one that will be a larger 
size and all of the same uniform shape and size, and one 
that will better resist diseases and be a larger yielder 
than any potato now known." Through the same means, 



New Forms of Plant and Animal Life 231 

the splendid market tomato has been evolved from a weed ; 
the luscious Baldwin is the descendant of the thorn apple ; 
and Burbank, in the near future, promises a seedless 
strawberry. 

Artificial selection has thus proved one of the most 
potent forces at the disposal of the agriculturist. Through 
it he has been enabled to revolutionize his The 
industry, and to place upon the market multi- conclu sion. 
tudes of nutritious vegetable and animal products. In 
industrial life, through the domestication of animals and 
the gradual development of beasts of burden, artificial se- 
lection has exercised an equally potent influence. 

QUESTIONS FOR RECITATION 

1. Define the process of selection. 

2. Explain the difference between artificial and natural se- 
lection. 

3. Give examples of each kind of selection. 

4. Show how each kind of selection is accomplished. 

5. Explain the meaning of "the survival of the fittest." Give 
examples. 

6. What is the purpose of artificial selection? 

7. Why is a knowledge of artificial selection useful to the modern 
farmer ? 

8. Explain in detail what artificial selection has accomplished in 
the animal world. Give illustrations. 

9. Show how it is of value in the poultry business. 

10. What has artificial selection done for the production of cereals? 
n. What has it accomplished in the fruit and vegetable world? 

PROBLEMS FOR DISCUSSION 

1. Discuss the meaning of evolution. 

2. Apply the doctrine of evolution to the development of man. 

3. What kind of selection is most dominant in the evolution of 
primitive man ? Of modern man ? Why ? 



232 American Economic Life 

4. Discuss some of the important contributions of artificial se- 
lection to agriculture ; to civilization. 

5. Can you cite any local instances of the selection process? 

6. Show how the process of selection operates in your own 
school life. 

7. Explain the process of the domestication of animals. 

8. Discuss the meaning of eugenics. 

9. What may eugenics accomplish for the human race? 

10. What are the limitations of the principle of artificial selection 
when applied to human beings ? 

SUPPLEMENTARY READING 

Conklin, E. G. Heredity and Environment. 
Darwin, C. Origin of Species. 

Harwood, W. S. The New Earth, Chaps. IV, VI, VIII, XVII. 
Schmucker, S. C. Meaning of Evolution. 

Warren, G. F. Elements of Agriculture, Chaps. I, II, VIII, XI- 
XV. 



CHAPTER XXV 

Early American Industry 

I. Origin of American industry 
i . Kinds of industries 

2 . The colonial policy : 

a. Meaning and application 

b. How carried out : 

(i) By industrial restrictions 
(2) By commercial regulations 

c. Effect of this policy 

3. Condition after the war : 

a. The new danger 

b. The proposed remedy 

4. Effect of War of 181 2 

II. The Industrial Revolution 

1. The "domestic system" 

2 . Inventions : 

a. Their importance 

b. Their effects : 

(1) On mechanical power 

(2) On transportation facilities 

(3) On labor-saving devices 

3. The "factory system" : 

a. Its essential features 

b. Its advantages : 

(1) In production 

(2) In consumption 

c. Its disadvantages 

Another form of wealth production which developed 
marvelously in the nineteenth century is found in the 

233 



234 American Economic Life 

realm of industry. An examination of American economic 
life will show that, not only in agriculture, but also in 
manufacturing, is the United States realizing its latent 
possibilities. 

Origin of American Industry. — The American colonists 
found open to them three kinds of industries. In the 
Kinds of nrs t place, they might engage in the primary 
industries, industries, such as lumbering, mining, and 
quarrying, which are concerned in converting natural 
resources into the raw materials of industry. In the next 
place, they might engage in the secondary industries, which 
work on the raw or semi-finished products, such as ship- 
building, iron manufacturing, and the manufacture of 
woolen goods, hats, clothing, and similar articles. Finally, 
the American colonists might engage in another form of 
industrial activity, — commerce. The harbor facilities, 
the proximity of the West Indian markets, together with 
the development of industry and of agriculture, afforded 
every opportunity for an easy exchange of commodities. 

Had the colonists been content to engage only in the pri- 
mary industries, involving the production of raw materials, 
Th they might have escaped coming into economic 

colonial conflict with England. According to the general 
po cy .* colonial policy of the seventeenth century, 

and colonies existed for the good of the mother 

apptcaiton. coun t r y ft was their function to supply raw 
materials for the home country to manufacture and sell 
back to them. England attempted to apply this theory 
by requiring the colonies to produce only raw materials, 
by transporting these raw products in her own ships to be 
manufactured at home, and by carrying back in her own 
vessels the finished products to be sold in America. In 



Early American Industry 235 

this way, the English manufacturer and merchant made 
several intermediary profits. 

To carry out this policy effectively, England resorted to 
many devices. Since manufacturing involved the use of 
machinery, the home government passed acts How carried 
prohibiting the exportation of machinery to the ouL 
colonies. But, despite this discouragement, the colonists 
journeyed to the English factories, imported some labor, 
brought in an occasional drawing or pattern, and, above 
all, proceeded to invent their own implements. England 
also discouraged American industry by passing acts for- 
bidding the colonies to manufacture certain goods produced 
in England. This prohibition was particularly severe 
on the New England colonies, where every effort had been 
made to encourage industry. 

To accomplish its end, Parliament further passed, toward 
the close of the seventeenth century, the Navigation Acts 
regulating and restricting commerce. Under these acts, 
the monopoly of English trade was to be held by Eng- 
lish ships and English subjects. As the colonists began 
shipbuilding at an early date, these acts struck a hard 
blow at a rising American industry and a growing American 
commerce. 

The effect of this policy, which, it must be remembered, 
was the general colonial policy of all European nations 
at that time, was to accentuate the gradually Effect of 
growing differences between the colonies and the this $ olicy - 
mother country. The North suffered most severely from 
the effects of this narrow policy and objected most stren- 
uously to its enforcement. It denied to the inhabitants of 
this region their logical occupations, — shipbuilding, manu- 
facturing, and commerce. This denial, added to the denial 



236 American Economic Life 

of political rights to the colonists, intensified the coming 
struggle for political independence. So often do we em- 
phasize the political side of this struggle, through the battle 
cry of " taxation without representation is tyranny," that 
it is well here to bear in mind the economic factors at work 
in the separation of the colonies from the mother country. 

While the Revolutionary War was in progress, national 
industry was really beginning. The English blockade, 
Condition following the declaration of war and continuing 
after the throughout the struggle, forced the colonists 
The new themselves to manufacturing. But when peace 
danger. was declared, American industry faced a new 

peril. For years, European manufacturers had been 
stocking up goods at home. When the war was over, 
these goods flooded the American market. Handicapped 
as the American manufacturers were by crude machinery 
and relatively high-paid labor, they were unable to com- 
pete successfully with their foreign rivals. 

To meet this situation, the American manufacturer 
naturally turned to some form of legislative protection. 
The This was first afforded by the Tariff Act of 

proposed 1 789. Soon after, Alexander Hamilton, Secre- 
tary of the Treasury, made a strong plea for 
protection in his famous report on the status of manu- 
factures. In this report, he took the position that " cus- 
toms duties " must be levied, if the " infant industries " 
of America were to compete successfully with the estab- 
lished industries of Europe. As a result of his recommen- 
dation, the rates in the Tariff Act of 1789 were increased in 
1790, and again in 1792. In this manner was inaugurated 
that policy of protecting American manufactures, which, 
with slight interruptions, has continued to the present day. 



Early American Industry 237 

Another factor of considerable importance in the early 
development of American industry was the situation 
brought about by the War of 181 2. This Effect of 
struggle had the indirect effect of stimulating Warofi8i2. 
manufacturing in the United States. At that time America 
was still largely dependent upon England for the bulk 
of needed manufactured articles. When war suddenly 
cut off this supply, the young nation was forced to depend 
more and more upon her own industrial activities. In 
this manner home manufactures were stimulated, just as 
one hundred years later the World War forced the United 
States in much the same way to develop new dye and 
chemical industries. 

The Industrial Revolution. — Before the middle of the 
eighteenth century, industry in whatever form it existed, 
both at home and abroad, was conducted along 
extremely simple lines. Its seat was in the "domestic 
home, where it was closely linked with the life system - 
of the family. The primitive spinning wheel and the old- 
fashioned hand loom were the chief tools of production, 
while the labor employed was made up of members of the 
family supplemented by a few outside laborers called in 
for special purposes. Goods were manufactured at home, 
by hand, with the assistance of a small group of family 
laborers. This method of manufacture has, therefore, 
been called the " domestic system " of industry. 

As contrasted with this early method of manufacture, 
we find that, to-day, industry is highly organized and 
extremely complicated. This change has been Inventions: 
wrought by the Industrial Revolution of the Their im- 
latter half of the eighteenth century. In i> ortance - 
effecting this change, inventions have been of paramount 



238 American Economic Life 

importance. In fact, without the inventions of the last 
one hundred and sixty years, men would still be working 
singly and inefficiently. Modern industry is "founded on 
inventions. Through them machinery has come to the 
aid of man, who has learned that, by working cooperatively 
with the help of machinery, industrial miracles may be 
accomplished. Steam and electric power are slaves, 
willing and eager to do the work of man. Inventions are 
the means whereby man directs and utilizes these forces 
of nature. 

The effect of inventions may be seen chiefly in three 
directions. In the first place, through inventions, 
Their mechanical power has been utilized to direct 

effects. industry. Man's physical strength is in- 

finitesimal. Mechanical power was therefore applied to 
the wheels of industry. A series of famous inventions, 
beginning with the work of Hargreaves, Arkwright, and 
Watt, first taught man how to apply the forces of nature 
to the field of industry. Water power, steam, and elec- 
tricity, each in succession has been substituted for human 
energy. To-day we even witness the harnessing of Ni- 
agara Falls, and the almost miraculous utilization of the 
vibratory forces of nature. 

Inventions have, in the second place, revolutionized 
means of communication. As soon as men discovered 
that the wheels of industry could be driven more cheaply 
and efficiently by mechanical power than by human 
energy, they applied this knowledge to improving their 
transportation facilities. The increased supply of economic 
goods could thus be transported cheaply between distant 
places. The development of the railway, the telephone, the 
telegraph, the trolley car, and the commercial automobile 



Early American Industry 239 

have all contributed vastly to industrial development. 
In the future the possibilities of the airship are yet to be 
realized. 

Inventions have finally exercised a wonderful influence 
on labor. The Yankee is noted for doing nothing by hand 
that may be done more quickly or cheaply by machinery. 
As a result, more labor-saving devices have been invented 
in the United States than in any other country. Examples 
of such machinery are found everywhere. In lifting and 
carrying heavy masses of iron and lumber, great cranes now 
do the work once done by human muscles. The old hand 
press of Benjamin Franklin's time has been replaced by the 
huge printing machines of the present day. By the in- 
vention of labor-saving machinery, the Yankee has caused 
his head to save his hands. 

The logical outcome of these new conditions brought 
about by inventions was the advent of the " factory 
system" of industry. It has already been The "fac- 
pointed out that during colonial times American ^ f^~ 
industrial methods and processes were simple Its essent i a i 
and easily performed. The home was the seat of M^res. 
industry. Here was done the work of spinning, weav- 
ing, and cloth making. But, with the advent of the new 
inventions of the latter half of the eighteenth century, 
industry required entirely new conditions. Complicated 
machinery could not be installed in the home ; it must be 
separately housed in the factory. Things were thus no 
longer hand-made and home-made, but machine-made and 
factory-made. Labor, too, instead of consisting of a small 
family group was now made up of great groups in large 
factories. In this manner, the nineteenth century wit- 
nessed the development of the factory system of industry. 



240 American Economic Life 

The advantages of this system are seen primarily in the 
production of wealth. The great quantities of goods 
its ad- produced by the factory make possible a de- 

vantages. crease in the cost of manufacturing. In con- 
trast to agriculture, which is subject eventually to the law 
of diminishing returns, manufacturing is subject to what 
is known as the law of constant returns. That is, the 
value of the product turned out increases, more or less 
regularly, with the cost of manufacturing. If, then, the 
cost of production can be reduced, while the demand for 
the product remains the same, the possibility of providing 
goods more cheaply becomes steadily greater. Inventions, 
by eventually reducing the cost of production, especially in 
the field of labor, normally result in a larger, cheaper, and 
better output of goods. 

From the standpoint of consumption, the advantages of 
the factory system are no less evident. Things which were 
formerly produced in the home with great care and ex- 
pense are now supplied by the factory. Hosiery firms in 
one week turn out ten thousand dozen pairs of stockings, 
while factories deluge the housekeeper with manufactured 
breakfast foods and canned fruit. Because the factory 
can do all this more cheaply than the home, man's con- 
sumption has become more varied. 

The factory system of industry has some disadvantages 
also. These were felt chiefly in the period of transition, 
its disad- when large numbers of skilled laborers were 
vantages. forced out of work by the introduction of 
machinery. However, after an adjustment to the new 
conditions had been effected, this evil was in part removed. 
A more present evil is found in the fact that individuals, 
living and working under the factory system, are subjected 



Early American Industry 241 

to the harmful conditions imposed by that system. In this 
connection attention has already been called to the evils of 
child labor, to the danger from unguarded machinery, 
from dust, high temperature, and lack of ventilation. 
Then, too, the massing of laborers in large cities near 
factories presents a serious problem. But after all, these 
conditions are transitory and may in the course of time 
be remedied. 

QUESTIONS FOR RECITATION 

1. Explain the kinds of industries open to the colonists. 

2. Why did they wish to develop secondary industries? 

3. What was the English colonial policy and how was it carried 
out? 

4. Was this policy beneficial to England? To the colonies? 
Why? 

5. Were the colonists justified in objecting to the British re- 
strictions on their manufacturing and commerce ? 

6. Had the American manufacturers no alternative, in 1789, 
but to ask for a protective tariff ? Does this necessity exist to-day? 

7. Explain the effect of the War of 181 2 upon American in- 
dustries. 

8. Explain the domestic system of industry. Can you cite any 
instances of this to-day? 

9. Describe the origin of the factory system. Explain its meaning. 

10. Discuss the importance and the effects of inventions to 
society. 

11. Describe the advantages of the factory system. 

12. What are the chief evils of the factory system? 

13. Can the evils of the factory system be separated from it ? If 
so, how? 

PROBLEMS FOR DISCUSSION 

1. Contrast the economic with the political causes of the Revo- 
lutionary War. 

2. What important influence did the division of industries — 



242 American Economic Life 

agriculture in the Southern, and manufacturing and commerce in the 
Northern colonies — have upon the later history of the United 
States ? 

3. Can any parallel be drawn between the English colonial 
policy of 1700 and the American colonial policy of 1900? 

4. Was Hamilton correct in assuming that a nation should be 
self-supporting through the production of all the necessaries of 
life? 

5. What factors made possible the rapid advance of American 
manufactures after 181 5? 

6. What advantage had the early American over the European 
manufacturer? What disadvantage? 

7. Where do the benefits of inventions go ? Explain fully. 

8. What is the most effectual way of encouraging inventors? 

9. Is the factory system essential to civilization? Why? 

10. Are there any ways in which the factory system may be super- 
seded ? 

11. Has the increased amount of goods produced under the factory 
system made up for the loss, individually, which has been the lot of 
many ? 

SUPPLEMENTARY READING 

Bogart, E. L. Economic History of the United States, Parts II and 

III. 
Cheyney, E. P. Industrial and Social History of England, Chaps. 

VII and VIII. 
Coman, K. Industrial History of the United States, Chaps. Ill, 

IV, V, VI. 
Toynbee, A. The Industrial Revolution. 
Wright, C. D. Industrial Evolution of the United States, Parts I, 

II, IV. 



CHAPTER XXVI 

Large Scale Production 

I. Nature of large scale production 
i. Its meaning 

2. The old method 

3 . The present method : 

a. An illustration 

b. Its essential features 

c. How it has spread 

II. Effects of large scale production 
i . The advantages : 

a. Decreased cost of production 

b. Control of the product 

c. Utilization of by-products : 
(i) Meaning 

(2) Examples 

d. Specialization in industry 

2. The disadvantages : 

a. Economic 

b. Political 

3. Other effects: 

a. On labor 

b. On capital 

4. The conclusion 

Nature of Large Scale Production. — The logical out- 
come of the factory system is the system of large scale 
production. This system is applied to that i ts 
modern method of production which involves meamn s- 
(1) the use of colossal sums of capital, (2) the highest 

243 



244 American Economic Life 

efficiency of labor secured through complete organization 
and perfect equipment, and (3) the control of the re- 
sources necessary to the production of the finished article. 
When the factory system first developed, production was 
accomplished in a comparatively simple manner, and for 
that reason was known as small scale production. But 
with the marvelous machinery and the perfected methods 
of recent years, modern production has entered upon a 
large scale stage. 

Consider, for example, in the iron industry, the difference 
between the methods employed in the last century and 
The old those used to-day. When iron ore was dis- 
method. covered in the Lake Superior region, after the 
iron industry had been centered at Pittsburgh, the manu- 
facturers of iron wished to transport the ore to the coal 
district. To accomplish this, steamboats were employed 
to carry the ore down the Lakes to a point near Pittsburgh ; 
and then the ore was taken from the boats by means 
of hand tools, such as shovels and wheelbarrows. This 
simple method of performing the work was known as 
small scale production. 

In contrast to this to-day we have the methods of large 

scale production. The ore, dug from the ore fields with 

steam shovels, is hauled to the lakeside and 

The present 

method: emptied on a high wharf. From this wharf 
Aniiius- the iron ore is dropped through chutes into the 
hold of an ore ship, which then proceeds to the 
lower Lake ports. Here special electrical machinery 
operates huge grab-buckets, which drop into the hold of 
the ship, grab from six to ten tons of ore at once, and 
transfer it to the cars waiting to convey it to Pittsburgh. 
By means of these grab-buckets, ten thousand tons of ore 



Large Scale Production 245 

can be transferred from the vessel to the cars in a few hours. 
In all these processes it will be observed that crude ma- 
chinery and muscular energy have been replaced by highly 
perfected mechanical appliances. 

But these appliances are not secured for nothing. The 
unloading plant itself costs a quarter million dollars, — 
a sum greater than that represented by the Its esse ntiai 
entire plant of the small scale producer. Large f eatures - 
scale production, therefore, necessitates not only the most 
modern machinery and the most scientific methods of 
production, but it further necessitates the vast sums of 
capital required for these purposes. Again, this production 
cannot be carried on without an army of industrial workers 
with a highly perfected organization. Finally, the large 
scale steel producer requires control of the basis of his 
industry, — the raw materials of coal and iron. 

The development of large scale production in the United 
States from the last quarter of the nineteenth century 
has been phenomenal. By no manner of means How it 
has this method been confined to the iron and has s P read - 
steel industries. On the contrary, it has spread to the 
production of oil, of sugar, of tobacco, of foodstuffs, of 
electrical appliances, of locomotives, of ships, and indeed of 
practically all the leading industries of the country. 

Effects of Large Scale Production. — This system of 
production has had a marked effect upon the industrial 
life of America. Its consequences have been , 

t .. . . . Advantages: 

both advantageous and disadvantageous, with Decreased 
the balance in favor of the benefits derived costofpro- 
from this system of production. Foremost 
among these benefits is the possibility of decreasing the 
cost of production. We have seen that the natural con- 



246 American Economic Life 

sequence of the factory system was to decrease the cost 
of production by reducing the amount, and, therefore, the 
cost of the skilled labor required under the old domestic 
system of industry. Large scale production, which is 
based upon the factory system, has greatly accentuated this 
tendency to reduce the cost of production by securing 
greater standardization in industry, by increasing the 
number of labor-saving devices, and by enlarging the 
economies of production. It must be remembered, how- 
ever, that decreased cost of production is not synonymous 
with lower prices. This distinction will be further em- 
phasized in discussing the evils of this system of pro- 
duction. 

Large scale production decreases cost of production, 
not only through the use of improved machinery, but 
Control a ^ so tnrou & n the control of raw materials, the 

of the utilization of by-products, and the specializa- 

tion of industrial processes. In the first place, 
this system of industry aims to place in the same hands 
the control of the product from the time it is raw material 
until it has been converted into a finished or semi-finished 
product. This fact may be well illustrated by the develop- 
ment of the Carnegie Steel Company. Andrew Carnegie, 
who originally controlled a small steel mill, wished to own 
also the raw materials, — ore and coke, — as well as the 
means of transporting them to his works. He there- 
fore proceeded to secure control, successively, of the Frick 
Company's coal and coke ; of extensive ore fields in the 
Lake region ; and, finally, of certain transportation lines 
running into Pittsburgh. In this manner, the Carnegie 
Steel Company secured control of steel from the ore bed 
to the finished rail. Since the result of this integrating 



Large Scale Production 247 

process is to develop a tendency toward monopolization 
of natural resources, the consequences of this policy, if 
pursued in an anti-social manner, may be disastrous to 
society. However, when the interests of the community 
are properly safeguarded, the ultimate effect of integra- 
tion in industry is advantageous to society. 

Another striking advantage of large scale production is 
found in its utilization of by-products. By-products are 
the waste of industry, which by special pro- v Tz . 
cesses are converted into economic goods. In ofby- 
the packing houses of the West, for example, 
bones are made into many useful articles ; fats provide 
glycerine for the preparation of soap and toilet articles ; 
and the gray matter of calves' brains is turned into medicine 
for the treatment of nervous diseases. Through the aid 
of by-product utilization, the great Western packer is 
enabled to sell his main product at a price lower than that 
charged by his competitors, and, thereby, secure partial 
monopoly of his business. When the power of the large 
scale producer is used in this manner, it takes the form of 
" unfair competition." 

Other industries effect similar savings. Slag, or waste 
from iron furnaces, is now made into high-class brick. 
" Buckwheat " and " dust " coal were formerly thrown 
away as refuse after the larger sizes had been screened out. 
To-day, however, this coal is utilized in the production 
of steam. Perhaps the best-known utilization of by- 
products has come with the development of the cottonseed 
oil industry. In i860, cottonseed was garbage; in 1870, 
fertilizer ; in 1880, cattle food ; and in 1890, table food. 
Such striking transformations make us wonder what the 
future may bring forth. 



248 American Economic Life 

Still another great advantage resulting from large scale 
production is found in specialization in industry. Al- 
speciaiiza- tnou g n l ar S e sca l e production has brought a 
Hon in large number of plants under one management, 

this centralization is resulting in each plant's 
specializing in the manufacture of some particular product. 
For example, in manufacturing blacksmiths' supplies, one 
factory makes horseshoes ; another, horseshoe nails ; a 
third, drills ; and a fourth, bolts and nuts. In this manner 
industry is being constantly specialized ; and, of course, along 
with this industrial specialization and minute subdivision 
of labor, great economies of production have been effected. 

Large scale production thus involves the possibilities of 
many advantages to civilization. However, as is usual 
The disad- with g rea t contributions to industrial develop- 
vantages: ment, this system of production is at times 
Economtc. accompanied by serious disadvantages to 
society. These evils may be economic, political, or social 
in character. On the economic side, the benefits resulting 
from the decreased cost of production, made possible by 
large scale production, may be enjoyed, not by the com- 
munity in the form of lower prices and higher wages, but 
by the great producers in the form of higher profits and lower 
wages. This situation is brought about by the unchecked 
monopoly power of the large scale producer, by means of 
which he may be permitted deliberately to crush his 
competitors. 

From the social and political standpoint, large scale pro- 
duction may result in equally potent evils to social welfare. 
An enormous amount of wealth, concentrated in 

Political- 

the hands of a relatively small number of indi- 
viduals, gives this group of men extraordinary- power over 



Large Scale Production 249 

the community. This power may be used for the benefit 
or for the detriment of society. For example, by means 
of this power, large scale producers may secure " special 
privilege " from the constituted authorities, and thus form 
what has been called a " corrupt alliance between business 
and politics." To overcome these evil possibilities, society 
must be constantly on guard to check the growth of corpo- 
rate monopoly power. 

Some other consequences, which have made a deep 
impress upon our social life, result from the system of 
large scale production. In the first place, men other 
do not produce finished goods. This result was, effects: 
of course, first brought about by division of 0n labor - 
labor, but the great specialization of large scale produc- 
tion has rendered this all the more inevitable. Formerly 
a man made a shoe, or a hat, or a coat. To-day he per- 
forms but one operation required in the productive process. 
For example, a man may simply polish the oil cups of 
locomotives, which are eventually used to haul food across 
the continent for his table. He no longer produces food, 
but directs his labor toward the performance of one ordi- 
nary operation. This change has resulted in labor's 
being highly specialized and organized in the form of a 
great industrial army. 

On the other hand, the effects of this system of large 
scale production have been felt perhaps even more in the 
organization and management of capital. The 
old, simple methods of doing business are rapidly 
disappearing. Formerly a man with a small amount of 
capital engaged in business independently ; to-day he be- 
comes one of a thousand all engaged in large scale pro- 
duction. The small, single-handed capitalist has been re- 



250 American Economic Life 

placed by the huge, cooperative corporation, which is the 
form of business organization necessitated by large scale 
production. 

Whether the benefits of large scale production are to 
accrue to society collectively, or to men individually, will 
The depend altogether upon the relation maintained 

conclusion, between the large scale producer and the com- 
munity politically organized, that is, the government. If 
society permits large scale production to be carried on by 
powerful groups of individuals without regard to the 
public interest, the benefits of this system will be con- 
fined to the few who direct its operation. If, on the other 
hand, the government maintains, through properly con- 
stituted authorities, a wise supervision and a sound regu- 
lation of the activities of the great giant producers, the 
welfare of society will be promoted and the interests of 
the producers safeguarded. Like the factory system, the 
advantages of large scale production are permanent and 
increasing, while the disadvantages are transitory and 
remediable. 

QUESTIONS FOR RECITATION 

1. Describe the evolution of large scale production. 

2. What is the relation between the factory system and large 
scale production ? 

3. Give the chief characteristics of large scale production. 

4. Contrast the methods of small scale production with those of 
large scale production. 

5. Give ten illustrations of large scale production in American 
industry. 

6. Enumerate in outline form the effects of large scale pro- 
duction. 

7. Explain how this system of production decreases the cost of 
production. Does it necessarily lower prices ? Why not ? 



Large Scale Production 251 

8. Show the effects of this system upon the control oi natural 
resources. Give examples. 

9. What is the relation between large scale production and the 
use of by-products ? Give examples. 

10. Does the saving through by-products always benefit the 
consumer ? Why not ? 

n. Show the relation between large scale production and spe- 
cialization in industry. Explain the effect of this upon labor. 

12. What effect has large scale production had upon capital? 

13. Explain the economic evils resulting from large scale pro- 
duction. 

14. Describe the political effects of large scale production. 

15. Show clearly how t,he economic evils of large scale produc- 
tion may be overcome. 

16. How may the political evils be remedied? 

PROBLEMS FOR DISCUSSION 

1 . What effects have inventions had on large scale production ? 

2. Are the advantages of large scale production an integral 
part of, or are they merely incidental to, this system of production ? 

3. Could modern society exist without large scale production? 
Explain. 

4. Discuss the economic effects on China of introducing a sys- 
tem of large scale production. 

5. Discuss the importance of by-products to modern industry. 

6. What has been the chief cause of the utilization of by-products ? 

7. Are the advantages derived by the public from large scale 
production more important than the disadvantages ? Why ? 

8. Is it likely that large factories will ever be devoted to portrait 
painting ? Give reasons. 

9. For which of the following articles is large scale production 
appropriate: hand-made shoes; machine-made shoes; furniture; 
nails ; cut glass ; orchids ; millinery? Tell why in each case. 

10. Do you understand that all business is destined to become 
large scale business? Give original illustrations. 

1 1 . Show how large scale production may result in the monopoliza- 
tion of natural resources. Give examples. 



252 American Economic Life 

12. Show the limitations of government regulation of large scale 
production. 

SUPPLEMENTARY READING 

Clay, H. Economics, Chaps. VII- VIII. 

Ely, R. T. Evolution of Industrial Society, Chap. V. 

Ely, R. T. Monopolies and Trusts, Chap. V. 

Jenks, J. W. The Trust Problem, Chap. II. 

Moore, J. R. H. Industrial History of the American People, Chap. 

XII. 
Smith, J. R. The Story of Iron and Steel. 
Wright, C. D. Industrial Evolution of the United States, Chaps. 

XIII and XIV. 



CHAPTER XXVII 

Business Organization 

I. The usual forms of organization 
i. The enterpriser 

2. The partnership : 

a. Its advantages 

b. Its disadvantages 

3. The corporation : 

a. Its nature 

b. Its advantages : 

(1) Great capital 

(2) Limited liability 

(3) Good management 

II. The trust form of organization 

1. Its nature 

2. Its different forms : 

a. The "pool" 

b. The board of trustees 

c. The holding company 

3. Its regulation : 

a. Why necessary 

b. How attempted : 

(1) Sherman An ti- trust Act 

(2) Clayton An ti- trust Act 

(3) Federal Trade Commission 

c. Influence of Supreme Court 

d. The outlook 

The Industrial Revolution, from the domestic system 
to the culmination of the factory system in large scale 

253 



254 American Economic Life 

production, is reflected in the world of business organization 
in a series of changes in industrial management. In fact, 
so important has this element of management become in 
modern industry, that it is now regarded as a new unit 
or factor of production. However, when this element of 
management is so regarded, it must be looked upon as a 
composite factor of production, that is, as a union of two 
or three of the original requisites of production — land, 
labor, and capital — upon which all wealth-producing 
operations depend. 

Usual Forms of Organization. — It was customary for 
many years past for business to be conducted and organized 
The enter- on a purely individual basis. A single employer 
priser. j- 00 k charge of the enterprise, furnished the land, 

labor, and capital required for the undertaking, assumed 
the risks involved in the transaction, and suffered the loss or 
reaped the profit according to the outcome of the project. 
In fact, this method is still pursued to-day by the inde- 
pendent business man who ventures out upon an industrial 
undertaking. Because he undertakes the full responsi- 
bilities of the business, he is called an enterpriser. Curi- 
ously enough he is found in both extremes of business. 
He may be a humble peanut vendor, a struggling boot- 
black, or an organizing manager of a great capitalistic 
business that reaches out into every state of the union. 
In the former case, however, he furnishes his own capital 
and labor ; while in the latter case he relies, at least in part, 
upon the capital and labor, as well as the natural resources, 
of others who have intrusted the management of these 
business elements to his care and guidance. In order to 
give this enterpriser a distinctive name, the term " entre- 
preneur " has been applied to him. 



Business Organization 255 

When the factory system became firmly established it 
was soon demonstrated that the best results from business 
undertakings were not obtainable from the old- _ 

, . . P , < , . . The partner- 

fashioned organization of business under a single ship : 

employer. Hence arose the partnership form of Its advan- 
business organization in which two or more indi- 
viduals enter business together. The single employer is re- 
placed by two, three, or more men who jointly and severally 
conduct the business, sharing its gains and losses. This 
method of doing business has a double advantage. Not 
only is the capital increased, but the work also is more ef- 
ficiently performed by reason of the fact that each partner 
is able to specialize in some particular direction. 

On the other hand, the partnership has two serious dis- 
advantages. The first of these lies in the fact that each 
partner is responsible, up to the value of his per- Its disad . 
sonal possessions, for all debts contracted by the vanta & es - 
other partners in pursuance of the business. A further 
disadvantage of the partnership is the limited amount of 
capital it controls. Although the amount is usually greater 
than that which a single business man commands, yet it 
falls so far short of the needs of modern times that other 
forms of business organization were devised. 

Therefore, to meet the necessities of large scale pro- 
duction, the industrial corporation came into existence. 
A corporation may be defined as " an association The cor _ 
of individuals, known as stockholders, who are poration: 
empowered by legal charter to elect annually a Its nature - 
board of directors, and through it to act as one person in 
the conduct of the specified business." The corporation 
is thus a legal entity, existing only in the eyes of the law. 
Although it is an artificial creature, it possesses many 



256 American Economic Life 

attributes of natural persons. For example, it has power 
to sue and to be sued ; to hold, purchase, and convey real 
and personal estates ; to appoint officers and agents ; and, 
above all, it is empowered " to have succession, by its 
corporate name, for the period limited in its charter, and 
when no period is limited, perpetually." This last feature 
of continued existence is extremely valuable to the corpora- 
tion because dependence upon the life of an individual en- 
terpriser, or partner, creates a most undesirable instability. 

Aside from its permanent character, the corporation, 
as a form of business organization, possesses other advan- 
its ad- tages. Chief among these is its ability to amass a 

vantages. great sum of capital. Thousands of individuals, 
through their purchase of stock in the corporation, con- 
tribute millions to its capital. This feature has already 
been referred to in connection with the effect of large scale 
production upon capital. 

The ability of the corporation to raise capital depends 
largely upon the principle of limited liability. According 
to this principle, stockholders are liable for the debts of 
the company only to an amount equal to the par value 
of their stock. If the business fails, therefore, a single 
stockholder can lose only the value of his stock. The 
exception to this general rule is in the case of national 
banks, where the liability is double the amount of the par 
value of the stock subscribed. 

The corporation also possesses advantages from the 
standpoint of the management of its business. This form 
of business organization secures flexibility. Through the 
simple process of a stockholders' election a complete change 
in the management may be effected. Likewise, through the 
offer of high salaries, the corporation is able to secure the 



Business Organization 257 

services of efficient men far beyond the reach of smaller 
concerns. Finally, the economies of large scale production, 
made possible by the resources of the corporation, con- 
stitute perhaps the greatest advantage of this form of 
business organization. 

Trust Form of Organization. — Just as the partnership 
was superseded by the corporation, so the single corpora- 
tion has been superseded in many fields of ac- 

, . ., , j-n 1 r i Its nature. 

tivity by a still larger unit of management, the 
trust. The trust, like the corporation, is a form of business 
organization devised to meet a definite economic need. 
Since it has taken on different forms, the trust is not 
capable of exact definition. However, it may be said 
to be a combination of corporations, and to have passed 
through three stages of development. 

The first form the trust assumed is popularly known as 
the " pool." In this form, independent producers in any 
one line of business make agreements to eliminate its forms: 
competition among themselves, either by restrict- The " pool." 
ing output or by fixing prices. This form of combination 
originated with railway companies. The pool is so named 
because, under such an arrangement, the receipts of the 
various companies are put into a common fund or " pool " 
and divided among them in a proportion already agreed 
upon. Not only has this system proved weak by reason 
of the outbreak of mutual jealousy and distrust, but such 
agreements have also been declared illegal. 

Therefore, the trust entered on its second stage of de- 
velopment. In this stage the various competing corpora- 
tions turn over their stock to a central board of The board 
trustees, which hands back " trust certificates " °f trustees - 
in exchange. This board, holding a majority of the stock 



258 American Economic Life 

of the various constituent companies, maintains complete 
harmony among the companies and regulates output and 
price. This is the " trust " in the technical sense. It has 
been declared illegal. 

The third form of the trust, devised because the 
" trustee " trust was outlawed, is known as the holding 
The holding company. Under the holding company plan, 
company. ^^ch. corporation entering the combination 
maintains its separate existence. To secure unity of action 
a central corporation is formed, empowered to hold stock 
of other corporations. The stock of the parent company 
is then exchanged for the stock of the various constituent 
corporations. This places under one central control the 
voting power of the stock of all combining companies, thus 
insuring uniformity of action and the maintenance of 
prices. This third stage resembles, in effect, very much 
the second, except that a board of trustees is illegal, and 
a corporation empowered to hold stock of other com- 
panies may or may not be illegal. 

The holding company, then, is the present form of busi- 
ness organization adapted to the needs of large scale pro- 
duction. But we have seen that this system 
tion: of production sometimes enables the few men 

Why who organize it to exercise enormous power over 

ecessary. ^ e community through their control over natural 
resources and their possession of vast sums of capital. By 
means of their monopoly power, the trusts are sometimes 
enabled to appropriate to themselves the benefits of large 
scale production by raising prices, limiting output, and by 
otherwise controlling production. Hence, to attain social 
welfare, it is necessary to exercise some form of public 
control over the trust organization of industry. At first, 



Business Organization 259 



the states attempted to exercise this regulation. In il 
Kansas took the lead by passing a law against business 
corporations, and was soon followed by other states in the 
movement to curb the power of the trusts. These laws 
usually struck at all combinations, regardless of whether 
they formed complete or only partial monopolies. They 
were so drastic in character that they were often declared 
unconstitutional. Furthermore, the laws of the different 
states conflicted in their provisions. But above all, state 
action proved inadequate because of the limited power of 
the states. In our dual system of government, the federal 
government alone has power over interstate commerce; 
and it is chiefly in this kind of commerce that the great 
corporations are engaged. Not state, but federal regula- 
tion, therefore, became imperative. 

In 1890 the demand for federal action became so general 
and insistent that Congress passed the Sherman Anti- 
trust Act. According to this act " every con- Eow at _ 
tract, combination in the form of trust or other- tem P ted - 
wise, or conspiracy, in restraint of trade or commerce 
among the several states, or with foreign nations " is de- 
clared illegal. Furthermore, this act makes it a misde- 
meanor for any* person " to monopolize, or attempt to 
monopolize, any part of the trade or commerce among the 
several states, or with foreign nations." To make effective 
this measure, the federal courts are given jurisdiction in 
these matters. This act is so sweeping in its terms that 
it has been held to apply not only to industrial combina- 
tions, but also to railway combinations and labor unions. 
In fact, the language of this act is so inclusive as to render 
difficult its exact interpretation. 

In 1 9 14, however, the passage of the Clayton Anti- 



260 American Economic Life 

trust Act modified and made clearer the terms of the 
original Sherman Act. This later act exempts labor unions 
from the provisions of the Sherman Anti-trust Act, pro- 
hibits one corporation from acquiring stock in another 
corporation with the purpose of substantially lessening 
competition between them, and makes illegal, under certain 
conditions, the system of interlocking directorates. 

In the same year, 1914, Congress established the Federal 
Trade Commission, composed of five members appointed 
by the President. This commission is not only endowed with 
large powers of investigation, but it also has the power 
to require special reports from interstate corporations 
whenever it believes such action is necessary to the public 
welfare. It may, upon the request of the Attorney General, 
investigate the activities of corporations that are suspected 
of violating the an ti- trust laws, and make proper recom- 
mendations for the reorganization of their business. It 
facilitates the operation of the Sherman and the Clayton 
Anti-trust Acts by providing new and more effective 
methods of procedure. In this manner it is hoped that 
any tendency to monopoly will be checked in its early 
stages. 

In the last analysis the legality or illegality of the so- 
called trust, that is, the holding company, depends upon the 
, decision of the United States Supreme Court. 

Influence of m . 

Supreme In 1910, this court handed down two vital de- 
cisions ordering the dissolution of the Standard 
Oil Company and the American Tobacco Company. In 
these cases it was conclusively proved that these corpora- 
tions were guilty of practices designed to secure a monopoly 
of trade and commerce in their respective industries. 
Through unfair competition and unreasonable restraint of 



Business Organization 261 

trade, these combinations had developed, in their particular 
fields, a monopoly with power to fix prices, limit output, and 
determine quality. The legality of the industrial combina- 
tion, therefore, is to be tested on the basis of monopoly. 
If the effect of the combination is to create such a monopoly, 
it is illegal; if the effect is otherwise, the combination is 
legal. This point of view was carried out to its logical 
conclusion in the decision of the Supreme Court in 1920, 
dealing with the United States Steel Corporation. Here 
the court held that the so-called " Steel Trust " is not 
a combination in restraint of trade, because, in spite of its 
size, it does not form a monopoly of the steel business, and 
it is therefore declared to be legal. 

Thus it is possible for certain combinations to be de- 
clared illegal, and for others to exist within the law. When 
one form of business organization is declared The 
illegal, another in harmony with the law will be outlook - 
devised, because large scale production appears to be a 
necessary part of modern industrial civilization. The 
process of evolution is at work in industry as well as in 
society ; and large scale production is one of its products. 
This does not mean, however, that a trust organization 
of industry need develop at the expense of social welfare. 
It merely means that, through proper legislation, the 
economies of large scale production and the benefits of 
monopoly, whenever they exist, should be appropriated 
by the community as a whole rather than by any one group 
of individuals. If it is true that large scale production 
is a stage of industrial evolution, it is useless to attempt 
to stifle it, and it is inimicable to social welfare to allow 
it to develop free of all social restraints. Both the interests 
of the producers and the interests of the consumers must 



262 American Economic Life 

be properly safeguarded by effective legislation. Per- 
haps the best method of accomplishing this end may be 
attained through industrial commissions which represent 
the interests both of the individual and of society. 

QUESTIONS FOR RECITATION 

1. Explain the importance of the element of management, or 
business organization, in modern enterprises. 

2. Is managing ability an original or composite factor of pro- 
duction ? Why ? 

3. Describe the simplest method of conducting business. What 
name is applied to this method ? Why ? 

4. Are the following entrepreneurs : a cobbler, a farmer, a con- 
sulting engineer, a banker, a railroad builder, the boss of a section 
gang ? Tell why in each case. 

5. What is a partnership? What are its advantages and dis- 
advantages ? 

6. Define a corporation. Why has it been called an "artificial 
person"? 

7. Explain why the corporation is an advantageous form of 
business organization. 

8. What is a trust? Why must the definition be general in 
nature ? 

9. Explain the difference between the "pool" and the "board 
of trustees." 

10. Explain how the holding company differs from either of the 
above forms of business organization. 

1 1 . What is the purpose of forming a holding company ? 

12. Explain clearly why it is necessary to control or regulate the 
trusts. 

13. Name the acts by which this regulation is attempted. Give 
the chief provisions of each. 

14. Explain the work of the Supreme Court of the United States 
in this direction. 

15. What is. the present form of the trust? When is it legal? 
When is it illegal? 



Business Organization 263 

16. What happens when the court orders the trust to dissolve? 

17. Do you believe that the trust organization of industry can be 
abolished ? Explain your answer. 

18. If not, what effective remedy do you suggest for the control 
of the trusts ? 

PROBLEMS FOR DISCUSSION 

1. Name the different forms of business undertaking. Discuss 
them from the standpoint of their relative strength and weakness. 

2. What are the chief points of difference between a corporation 
and a partnership ? 

3. What advantages has a corporation as compared with a part- 
nership ? Are there any respects in which a partnership has advan- 
tages not possessed by a corporation ? 

4. What is a holding company? What are the advantages 
afforded by this form of organization ? 

5. Is the growth of combination in accord with economic law? 
Why? 

6. Is the movement toward combination still going on? Is it 
likely to continue in the future ? 

7. Are all trusts monopolies? Are all monopolies trusts? 

8. What social advantages and disadvantages do you see in the 
trusts ? 

9. Is there likely to be a world corporation formed, or a "great 
trust" in which every one will be a shareholder? 

10. What are the arguments for and against full publicity? 
n. On what basis should the amount of capitalization of a trust 
be determined? 

12. What are the checks on the power of monopolies to raise the 
prices of their products? 

13. What advantages and disadvantages do you see in monopoly? 

14. Would the abolition of the tariff result in the disappearance of 
the trusts ? 

15. Name some of the tendencies in the organization of natural 
resources. 

16. Name some indications of increasing governmental activity 
in business. 

17. State the conflicting views regarding the trust. 



264 American Economic Life 

SUPPLEMENTARY READING 

Carver, T. N. Principles of Political Economy, Chap. XIV. 

Clark, J. B. The Control of Trusts. 

Ely, R. T. Outlines of Economics, Chap. XIII. 

Jenks, J. W. The Trust Problem, Chap. VII. 

Montague, G. H. Rise and Progress of the Standard Oil Company. 

Moore, J. R. H. Industrial History of the American People, pp. 

428-438. 
Van Hise, C. R. Concentration and Control. 



CHAPTER XXVIII 

The Industrial Army 

I. Labor cooperation 

i. The stages of cooperation : 

a. Simple cooperation 

b. Division of employments 

c. Division of labor 

d. Specialization in industry 
2. Advantages of cooperation : 

a. Concerning the product 

b. Concerning machinery 

II. The army of workers 
i . The organizer : 

a. Policies and subordinates 

b. Markets and methods 

2. The manager 

3. The foreman 

4. The wage worker : 

a. The skilled worker 

b. The semi-skilled worker 

c. The unskilled worker 

5. The conclusion 

The change in business organization brought about by 
large scale production has been accompanied by a similar 
development in the organization of labor. Formerly, 
industrial effort was largely individual and competitive ; 
to-day it is almost altogether social and cooperative. 

Labor Cooperation. — In the days of savagery, com- 
paratively little industrial work was performed. The 

26s 



266 American Economic Life 

men fought, hunted, and fished, while the women took 
charge of the primitive industries. Gradually, however, 
its stages: military cooperation led to industrial coopera- 
Simph co- tion. Men who had worked together to kill a bear 
operation. re sorted to the same method in throwing logs 
across a stream. Although no task was assigned to definite 
individuals, each man helped the other by taking part in 
the operation. This stage in the development of labor is 
described as simple cooperation. 

But simple cooperation at best is unsatisfactory. Some 
men like to do one thing better than another ; hence the 
~. . . , development of the second stage of labor coopera- 

Dtviston of * ox 

employ- tion known as the division of employments. In 
this stage, one group kills game, another builds 
boats, while the women carry on agriculture or weave 
cloth. Each produces a finished product, which is ex- 
changed for the product of some other group, and thus a 
certain degree of interdependence runs through early 
society. 

The next step in labor cooperation is division of labor. 
Formerly, in building a house one man would perform all 
Division of the parts of that operation. He would go into 
labor. thg WO ods, fell the trees, and build the house. 

But gradually the different kinds of labor involved in the 
task of house building were divided among several individ- 
uals. One man would simply fell the trees ; another cut 
them into logs ; another haul the lumber ; and another 
build the house itself. In this case several men cooperate, 
but each performs a different part of the labor. 

Finally, this simple division of labor becomes complex 
through what is known as specialization in industry, — the 
fourth and present stage of labor cooperation. By means 



The Industrial Army 267 

of this principle of specialization, each part of the labor 
already divided has again been further subdivided in the 
various processes necessary for the finally per- . .. 

r J J r Spectahza- 

fected operation. For example, in the above Hon in 
illustration, the man who chopped down the tree 
— one part of the labor — was provided with an ax which 
was the result of the labor of scores of workmen, each one 
of whom performed some particular part in the process. 
In this manner, modern methods of production have re- 
sulted in minute subdivision of labor and great specializa- 
tion in industry. Cooperation has made this possible. 

By means of this form of labor cooperation, the product 
is not only increased in quantity, but improved in quality. 
Persons who cooperate in labor learn intimately Advantages: 
the special tasks they perform. Each one is able Concerning 
to do his work much more effectively, therefore, ihe i> roducL 
than he would be able to perform work involving a large 
number of separate operations. For this reason, a hundred 
socially organized workers in a shoe factory are able to 
turn out more shoes and better shoes than a hundred 
individual shoemakers. 

Another great advantage of this kind of cooperation is 
found in the fact that it makes possible the increased use 
of machinery. When an involved operation, concerning 
like shoemaking, has been minutely subdivided mach ™ er y- 
into forty or fifty operations, the rougher work may be 
done more quickly and more cheaply by machinery than 
by human hands. Thus, the sewing machine, stitching 
through heavy leather, accomplishes a speedier and better 
result than the individual hand worker. In this manner, 
man's inventive genius develops labor-saving machinery 
to take the place of human energy. It is this high special- 



268 American Economic Life 

ization in industry which furnishes the opportunity for 
man to invent and develop the machinery required for 
the special processes. 

The Army of Workers. — To-day, as a result of this 
high specialization in industry, all modern industrial labor 
The is cooperative. The American labor force is thus 

organizer: highly organized from top to bottom in the sem- 
subordi- blance of an industrial army. At the head of this 
nates. army of workers is the organizer, — the com- 

mander in chief of his particular industry. Like the 
military commander, his duties are to determine broad 
policies and to intrust their administration to competent 
hands. The great organizer mobilizes the forces of labor 
and capital and applies them to natural resources in such a 
way that the smallest outlay produces the largest return. 
He is an executive and leaves all details of administration 
to his subordinates, for whose competency he is responsible. 
It is to his creative genius that we owe the trust organization 
of American industry, and to him has been applied the 
phrase " Captain of Industry," as well as the term entre- 
preneur. 

The organizer must also have an intimate knowledge 
of the general markets. He must know what goods are in 
Markets and demand, and where and when this demand is 
methods. most active ; that is, where prices are highest. 
He must likewise have a thorough knowledge of industrial 
processes and methods of production, so that by-products 
may be fully utilized and large scale production carried on 
efficiently. 

Next to the organizer in this industrial army is the manager. 
Like the colonel of a regiment, he executes the orders and 
carries out the plans of his superior officer. The manager, 



The Industrial Army 269 

therefore, must be in closer touch with the details of the 
business. While the organizer directs from his New York 
office the policy of a whole group of establishments The 
throughout the country, the manager is respon- mana ger. 
sible for the successful management of only one of these 
plants. He must understand not only the local labor 
market, but also the possibilities of capital in his particu- 
lar branch of industry. It is his duty to bring these two 
together so that he may secure the greatest possible pro- 
duction. 

Below the manager is the superintendent, foreman, or 
" boss," corresponding to the captain, lieutenant, or 
corporal of a military organization. It is the The 
duty of the superintendent to see that the men foremen - 
do the work that the manager has outlined. He is respon- 
sible for the management of his department, and for getting 
all the work possible out of the group under his charge. 
The foreman, as well as the " boss," requires special ability 
to get along with the laborers, and to persuade them or 
compel them to work effectively. In the past, the Irish 
have made the best " bosses," but Italians and Slavs are 
now being used to direct the work of their own countrymen. 

We now come to the ordinary workers themselves, — 
the rank and file of this industrial army. Just as the 
successful execution of a general's orders depends, 
in the last analysis, upon the bravery and power worker: 
of the great mass of soldiers, so the real test of The skilled 

udotJzet 

a nation's efficiency is found in the ability and 
character of its great body of wage workers. For con- 
venience, the wageworkers may be divided into three 
groups, — the skilled, the semi-skilled, and the unskilled. 
The skilled worker is one who does work that requires a 



270 American Economic Life 

longer or shorter period of training or apprenticeship. 
In this class are included the typesetter, the blacksmith, 
the carpenter, the skilled clerk and bookkeeper, and a 
host of others who have received more or less special 
training in their respective lines of work. 

The semi-skilled worker is one doing work that may be 
learned with comparative ease by any newcomer who has 
The semi- ordinary intelligence and ability. Although it is 
skilled hard to give an accurate definition of the semi- 

skilled wageworker, the number of men in this 
class is quite large. For example, in this group are in- 
cluded the miner, the brakeman, the motorman, the me- 
chanic's helper, and numerous other laborers doing work 
which requires some little skill and intelligence, but no 
particular period of apprenticeship. 

The unskilled worker represents a maximum of physical 

force and a minimum of mental capacity. The street 

laborer, the coal heaver, and the ditch digger 

The un- ' \ °° 

skilled are representatives of this class. The number 

of laborers in this group rapidly increased in 
the nineteenth century by reason of two circumstances. In 
the first place, thousands of immigrants to this country, 
who were unable to speak the English language, were 
forced into the ranks of unskilled labor regardless of their 
native ability. In the second place, the rapid introduction 
of machinery often deprived a skilled worker of his regular 
labor and forced him temporarily into the lower ranks, 
so that he was obliged to attend to the machine which 
displaced his own skilled labor. 

Large scale production has left as deep an impress upon 
labor as upon capital. This twofold aspect of modern 
American economic life presents some of the most strik- 



The Industrial Army 271 

ing problems of individual and social welfare. Through 
cooperation, industrial efficiency has been secured and 
economic progress attained. This same principle The 
must be utilized to attain individual welfare and conclusion, 
prosperity in the rank and file of the great army of industrial 
workers. 

QUESTIONS FOR RECITATION 

1. Trace the development of labor cooperation. 

2. Is it true that primitive man made woman do all the work? 
Explain clearly. 

3. Explain the difference between the second and third stages 
of labor cooperation, and give examples of this difference. 

4. Show how specialization in industry differs from division of 
labor. Give examples. 

5. Show the development of all four stages of labor cooperation 
in the construction of bridges from primitive times to the present 
day. 

6. Show the effect of cooperation on goods ; on inventions. 

7. When industries were being organized on a trust basis, what 
new industrial leader arose ? What are his distinctive duties ? What 
service has he rendered to America ? 

8. Why is this leader sometimes called an entrepreneur? How 
does the entrepreneur differ from the single employer of a hundred 
years ago? 

9. Explain the duties of a manager and his relation to the or- 
ganizer. Is this term ever misused? How? 

10. State the lower grades of officers in the industrial army and 
their duties. 

11. Classify the rank and file of industrial laborers. Describe 
the characteristics, and give examples, of each group. 

12. Describe in detail the organization of some enterprise with 
which you are familiar, conducted on the basis of large scale pro- 
duction. 



272 American Economic Life 

PROBLEMS FOR DISCUSSION 

1. What is the relation between labor cooperation and economic 
progress ? Explain clearly ; give examples. 

2. Discuss the importance of labor cooperation in securing in- 
creased production. 

3. Is labor cooperation increasing or decreasing in extent? 
How? 

4. What is the relation between labor cooperation and large 
scale production? 

5. Is modern labor cooperation voluntary? Explain. 

6. Draw a diagram showing the organization of labor in modern 
industry. 

7. What differences can be noted in the organization of labor 
in the early colonies and in the United States at the present time ? 

8. Is the organizer necessary to modern industry? Why? 

9. What service has the organizer rendered America? 

10. Is the supply of organizing ability limited? If so, by what? 

11. Is the average school in America calculated to develop or- 
ganizing ability ? Explain clearly. 

12. What is the relation between our school system and the wage- 
worker? How can it be improved? 

SUPPLEMENTARY READING 

Clay, H. Economics, Chap. II. 

Ely, R. T. The Labor Movement in America. 

Ely, R. T. Evolution of Industrial Society, pp. 74-98. 

Hobson, J. A. The Industrial System. 

Levasseur, E. The American Workman. 

Seager, H. R. Introduction to Economics, Chap. VIII. 

Veblen, T. Theory of Business Enterprise, Chaps. Ill, VI, VII. 

Webb, C. Industrial Cooperation. 



CHAPTER XXIX 

Transportation Agencies 

I. Railroad transportation 
i. Its importance 

2. Its rapid growth 

3. Centralized control 

4. Nature of the railroad business : 

a. The railroad a monopoly : 

(1) The reasons 

(2) Consequent problems 

b. The railroad a "quasi public" corporation : 

(1) Receives public aid 

(2) Possesses right of " eminent domain" 

c. The conclusion 

II. Other transportation agencies 

1. The telegraph 

2. The telephone 

3. Express companies : 

a. Their growth 

b. Their regulation : 

(1) Why necessary 

(2) What the United States has done 

4. Electric traction : 

a. Urban transportation 

b. Rural transportation 

c. Electrification of steam roads 

5. Water transportation 

6. Progress attained 

Another distinct phase of American economic life appears 
in the development of transportation facilities. Foremost 

273 



274 American Economic Life 

among these facilities is the railroad ; but growing steadily 
in importance are other transportation agencies, such as 
the telegraph, the telephone, express companies, electric 
traction, and water transportation. Each of these demands 
separate consideration. 

Railroad Transportation. — Railroad transportation has 
made possible the American nation. Politically, it has 
its im- performed an inestimable service by bringing the 

portance. diverse parts of the union within easy reach of 
each other. To-day, the city of Washington is nearer to 
San Francisco than it was, in early days, to Boston. From 
an economic standpoint, the service rendered by the rail- 
road has been no less profound. It has bound North and 
South, East and West into a gigantic economic unit, 
complete and self-sustaining in all important respects. 
This the railroad has accomplished by giving goods " place 
utility," that is, by transporting goods from one place 
where they are not needed to another place where they are 
in demand. The railroad has thus become the connecting 
link between the producer and the distant consumer. A 
sudden disturbance of this relationship would result in the 
paralysis of American economic life. 

The growth of railroad mileage in the United States 
has been astonishing. In 1830 there were, in this country, 
its rapid on ty twenty- three miles of railroad; in i860 
growth. there were over thirty thousand miles; in 1880, 
over ninety- three thousand miles ; in 1900, over one hun- 
dred and ninety- three thousand miles ; in 1 910, two hundred 
and forty thousand miles, and in 1920, nearly three hundred 
thousand miles. This growth in railway facilities is 
without parallel in the economic history of any other 
people. 



Transportation Agencies 275 

Accompanying this increase in mileage is the movement 
toward centralization of railroad control. Two hundred 
and ten independent roads, each with its own centralized 
president, in 1883, had been consolidated, by contro1 - 
1907, into fifty or less. This movement toward centraliza- 
tion has been so rapid that, if it continues unchecked, it is 
not idle to speculate on the day when four or five men, 
sitting around a table, will control all the important track 
mileage of the country. At present sixty per cent of the 
mileage of the United States is under the control of five 
large interests. During the period of government opera- 
tion, naturally all the important mileage of the country 
was under the control of one central authority. 

The true significance of railroad concentration becomes 
apparent only when one considers the nature of the rail- 
road business. The railroad is a partial mo- its nature: 
nopoly ; that is, it performs a service which few A monopoly. 
other agencies perform, the cost of which decreases with 
the increase in the volume of business. The initial cost of 
constructing a railroad is so great that, from a social point 
of view, it is an economic waste to construct another line to 
duplicate the work of the first road. Moreover, after the 
trackage, terminal facilities, and rolling stock have once 
been provided, an increase in the volume of business does 
not mean a corresponding increase in the expense of opera- 
tion. In fact, the unit expense diminishes as the business 
increases, and the railroad therefore benefits by what is 
called the " law of increasing returns." 

In spite of legal prohibition, railroads in the past have 
used their monopoly power unfairly. For example, the 
law declares that railroads, in transporting commodities, 
shall not discriminate between individuals, but shall offer 



276 American Economic Life 

their services to all on equal terms. Nevertheless, because 
of the law of increased returns, the traffic manager is ever 
tempted to accept extra business at a lower rate. This 
conflict between railroad profits and public interests some- 
times leads to a violation of the principle of equal rates 
for equal service, and has resulted in the practice of grant- 
ing rebates to favored corporations. 

Another distinctive feature of the railroad is its close 
dependence upon the government. This close relation 
, „ . between the railroad and the public has caused 

A guast L 

public " the railroad to become a "quasi public " corpora- 
corporatton. ^.^ j n bringing about this situation two 
factors are chiefly responsible. In the first place, rail- 
roads from the earliest times have received financial aid 
from the states. In addition to this, the national govern- 
ment has not only advanced money, but also contributed 
thousands of acres of public land. Thus, railroads are 
especially indebted to the public, and are therefore clearly 
marked off from ordinary private economic activities. 

But of even greater public significance is the railroad's 
right of " eminent domain." According to this right, a 
state, upon the payment of just compensation, may take 
private property for public use even against the will of the 
owner. To facilitate the railroad in performing its service, 
the state has delegated this right to the transportation 
company and thus endowed it with extraordinary power. 
Railroads are peculiarly indebted to the public, and those 
who manage them should pay especial regard to public 
welfare. They are not free to charge what rates they 
choose, to decide what sections of the country shall prosper, 
or what private interests shall thrive at the expense of the 
public good. 



Transportation Agencies 277 

Besides the importance which it derives from its quasi 
public nature, the railroad business is of tremendous 
magnitude. According to statistics of the Inter- The 
state Commerce Commission in 191 7 the labor conclus ™ n - 
employed in railroading numbered about 1,500,000; the 
capital invested approximated $20,000,000,000 ; and the 
gross earnings amounted to $3,000,000,000. Thus, in the 
number of laborers employed and in the amount of capital 
invested railroading is, next to agriculture, the greatest 
single business in the United States. 

Other Transportation Agencies. — While the railroad is 
by far the most important transportation agency in the 
United States, there are other agencies which play a great 
part in promoting national prosperity and efficiency. 
Chief among these are telegraph, telephone, and express 
companies, which, together with electric traction, constitute 
an exceedingly important group of transportation agencies. 

The telegraph developed along the lines of railway com- 
munication. With improvements in the railroad system, 
it became necessary to have some means of The tele- 
speedy communication, not only between rail- sraph. 
road stations, but also between signal towers. Since the 
telegraph was the earliest means of instant communica- 
tion, telegraph and railroad lines at first everywhere 
paralleled one another. With the opening of the present 
century, however, this community of interests was not 
always maintained. 

During the last quarter of the nineteenth century, the 
telegraph met a keen competitor in a new device — the 
telephone. Unlike the telegraph, which was iheteie- 
immediately used for long distance communica- P hone - 
tion, the telephone at first was employed only to communi- 



278 American Economic Life 

cate within buildings, or to communicate between places 
within the same city. Gradually, however, the sphere of 
the telephone was broadened, until, to-day, a conversa- 
tion between New York and San Francisco is an ordinary 
occurrence. Despite the efforts of the telegraph companies 
to secure trade, through the introduction of the " night 
letter " and similar innovations, the telephone has 
largely supplanted the telegraph as a direct and effective 
means of short distance communication. 

Of quite a different character is the transportation fur- 
nished by express companies. While heavy commodities 
are transported by freight, small packages require 
companies: a speedier, easier ' method of transportation. 
Their Therefore, the express business was developed in 

growth. 

the United States. Express companies developed 
side by side with the early railroads, until a strong com- 
munity of interests arose between them, and a close identi- 
fication of business relationships followed. 

At first, the express business was organized locally and 
conducted by a number of separate companies. Soon, 
Their reg- however, this business, while not under one 
ulation. formal unified control, was nevertheless com- 

bined into one great system operated on a business under- 
standing so effectual that territory was divided and rates 
agreed upon without a sign of competitive spirit. As a 
result of this understanding, express rates in the United 
States at the opening of the twentieth century were very 
high. 

As a means of obviating private extortion in the carriage 
of small packages, Europe was first to adopt the parcel 
post system. For a very low charge, the government 
carried packages of considerable size and thereby com- 



Transportation Agencies 279 

peted with the private express companies. In the United 
States the private companies worked consistently, and, 
for a long time, effectively, against the passage of parcel 
post legislation. However, in 1913, after long-continued 
agitation, a parcel post law was finally enacted. The 
rates under this law were so low that in the following 
year the United States Express Company, a private corpora- 
tion, was forced out of business. 

The form of transportation which, recently, has had the 
most rapid growth is electric traction. While electric cars 
were operated during the last two decades of the Electric 
nineteenth century, it was not until the very traction: 
close of the century that the " boom " in electric traction 
began. Since that time fmanciers*have turned their atten- 
tion to electric traction operations. 

The electric traction problem has three distinct phases, 
— urban transportation, rural transportation, and elec- 
trification of steam roads. The concentration T7 . 

Urban 

of population in large cities has made the prob- trans- 
lem of urban transportation most acute. 
While cities have grown greatly in extent, the business 
center has remained comparatively small. Therefore, 
the increased population of the outlying regions must have 
some means of rapid transit. With a maximum of speed 
and a minimum of expense in operation, the electric car 
offers by far the most effective means of transporting 
the city dweller to his place of work. 

At the same time that street railways have been electrified 
and extended, inter-city and rural electric lines have been 
developed. As compared with steam roads, Rura i trans . 
the cost of installing and operating such lines is P° rtation - 
small. Consequently, electric traction facilities have 



280 American Economic Life 

been afforded sparsely settled districts where steam trans- 
portation would have been unprofitable. Furthermore, a 
steam road, requiring a comparatively level bed, necessi- 
tates heavy cutting and filling. On the other hand, an 
electric car climbs almost any hill, and the cost of grading 
is thus reduced to a minimum. Hence, the rural electric 
line reaches many points not accessible by the steam rail- 
way. In this manner, electric traction has proved a real 
boon to the country dwellers. 

The third phase of electric traction — the electrification 
of steam roads now in use — has as yet barely begun. 
™ .- The New York Central road has electrified some 

Electrifica- 
tion of suburban lines running out of New York City 

with gratifying results, while the Pennsylvania 
Railroad has begun the work of electrifying all its suburban 
lines. Since such electrification is profitable in cases of 
growing suburban districts, it is more than likely that, 
during the next few decades, all the suburban steam roads 
running out of the larger American cities will be electri- 
fied. 

In considering agencies of transportation we must not 
overlook the possibilities of water transportation. In 

an earlier chapter we have already pointed 
trans- out the unsurpassed system of waterways in 

portation. ^ e Tjmted States, and their great advantage to 
commerce because of the decreased cost of water trans- 
portation. The Panama Canal will prove to be especially 
stimulating to the American coastwise traffic, particularly 
if American ships engaged in this commerce are again 
accorded free passage through the Canal. Of even 
greater importance, however, is the question of a merchant 
marine. The World War gave to the United States a 



Transportation Agencies 281 

merchant marine four times greater than it possessed 
before the outbreak of hostilities. It created for the Ameri- 
can people a great ocean-going fleet of 10,000,000 tons at a 
cost of more than $3,000,000,000. Whereas, in 19 10, only 
eight per cent of the imports and exports of the United 
States were carried in American vessels, in 1919 nearly 
twenty-eight per cent of American foreign trade was 
so carried. The problem that confronts us is to main- 
tain, and increase in the future, the American tonnage of 
ocean-going ships. This can only be done through some 
form of wise governmental action which will make it 
possible for the American shipbuilding industry to compete 
successfully with its European rivals. 

The means of transportation are the arteries of American 
business and social life. At the opening of the nineteenth 
century, the American people traveled on land p rogre ss 
and water at the same rate that Julius Csesar attain ed. 
traveled centuries before. Since the Roman roads were so 
superior to our own, modern land transportation may have 
even been inferior to that of the ancients. But, during 
this one century, marvelous progress was made in the 
means and methods of transportation. Space and time 
were annihilated, distant places connected, goods and 
persons easily transported, and communication between 
distant places established. The future, too, holds out 
unknown possibilities for the automobile truck and the 
magic airship. 

QUESTIONS FOR RECITATION 

1. Explain the importance to the nation of the railroad (1) from 
a political standpoint, and (2) from an economic standpoint. 

2. Trace the development of American railroads, both in mileage 
and in management, from 1880 to the present time. 



282 American Economic Life 

3. Give the distinct characteristics of the railroad business, 
contrasting it in these respects with the manufacturing industries. 

4. Explain clearly why the railroad tends to become a monopoly 
and the consequences. 

5. Explain the meaning of the law of increasing returns. 

6. Show why the railroad is a quasi public corporation. 

7. Why has the state delegated the right of eminent domain to 
the railroad ? 

8. Is agriculture or railroading more important? Why? 

9. Contrast the development, and the function, of the telegraph 
and the telephone. 

10. Explain why it was necessary to regulate express companies, 
and what Congress has accomplished in this direction. 

11. What are the three chief forms of electric traction? Explain 
why each is important. 

12. Explain the importance of inland water transportation in the 
United States. 

13. State the growth of the American merchant marine during 
the World War. Explain this growth. What do you think of its 
future possibilities ? 

14. Contrast present day methods of transportation with those 
of ancient times. 

PROBLEMS FOR DISCUSSION 

1. In what sense is transportation productive? 

2. Why is transportation a greater and more difficult problem 
in the United States than in most countries of Europe ? 

3. How would the sudden cessation of all railroad traffic affect 
the life of the American people ? 

4. If there were no railroads, would there be any "trusts"? 

5. If one person rides on a pass, who pays for that ride? 

6. How does the Pennsylvania Railroad differ from a large de- 
partment store in regard to its freedom in making rates or prices ? 

7. What effect has the prosperity of the railroads on the steel 
industry? Explain fully. On other industries ? 

8. Have American railroads in general followed or directed the 
course of settlement of the country ? Why ? 



Transportation Agencies 283 

9. Would private capital have been invested in railroad build- 
ing, if the chance of extraordinary gain had been greater in other 
industries ? Explain clearly. 

10. Are local famines likely to be as serious in China in the future 
as in the past ? Why not ? 

11. Has railroad transportation relieved or aggravated the prob- 
lem of congestion in great cities ? 

12. Discuss the arguments for and against a governmental policy 
of granting ship subsidies. 

13. Give the arguments for and against the free passage of Ameri- 
can coastwise ships through the Panama Canal. 

SUPPLEMENTARY READING 

Ac worth, W. M. Elements of Railway Economics. 

Carver, T. N. Principles of Political Economy, Chap. XIX. 

Johnson, E. R. American Railway Transportation. 

Johnson, E. R. Elements of Transportation. 

Johnson, E. R. Ocean and Inland Water Transportation. 

Moulton, H. G. Waterways versus Railways. 

Smith, J. R. The Ocean Carrier. 



CHAPTER XXX 

Regulation or Railroads 

I. The early situation 
i . Power of Congress : 

a. The original clause 

b. Why power was granted 

c. How first applied 
2. Growth of railroads : 

a. How favored at first 

b. What evils crept in 

c. The changed attitude 

II. The Interstate Commerce Act 
i. Main provisions 

2. Powers of Commission 

3. Why discriminations were prohibited 

4. Other results of the act 

5. The defects 

III. Later legislation 

1. Effect of Anti- trust Act 

2. Act of 1903 

3. Act of 1906 

4. Act of 1910 

5. War-time regulation : 

a. Government operation 

b. Act of 1920 : 

(1) Commission's powers 

(2) Other provisions 

6. Importance of regulation 

7. The outlook 

284 



Regulation of Railroads 285 

The Early Situation. — The Constitutional Convention 
of 1787 gave the national government the following power 
over commerce, — " Congress shall have power Power of 
to regulate commerce with foreign nations, and Congress: 
among the several states, and with the Indian The clause - 
tribes." The most significant point about this provision 
is its general and inclusive nature. The word " commerce ' ' 
has proved to be so embracing that Congress has been 
enabled, with the lapse of time, to exercise powers over ac- 
tivities that could not have been foreseen by the framers 
of the Constitution. With the application of steam to 
industry and transportation, commercial activities have 
so widened that the national government, through this 
clause, has been able to exercise a restraining control 
over many anti-social tendencies in American economic 
life. 

The necessity of giving the central government some 
power over interstate commerce was one of the leading 
reasons for framing the new constitution. The m , , 

Why the 

conflicting interests that resulted from giving power was 
the individual states control over commerce grante ' 
proved conclusively, during the regime of the Articles of 
Confederation, that some federal regulation of commerce 
was absolutely necessary. Therefore, when the new 
constitution was drawn up, Congress was given exclusive 
power to regulate interstate commerce. 

This new power of Congress was at first applied to the 
regulation of water transportation between different 
states, since waterways (aside from roads) were How first 
the earliest means of transporting goods and a PP lied - 
persons from one place to another. But, with the im- 
petus given to railroad construction in the epoch fol- 



286 American Economic Life 

lowing the Civil War, the regulation, not of water, 
but of land transportation became the absorbing prob- 
lem. 

At first, the railroad was encouraged because it proved a 

blessing to newly developing communities. Cities and 

, ± states vied with one another in buying railroad 

Growth of ... . . . 

railroads: securities, in granting immunity from taxation, 
How and in affording every inducement for railroad 

favored. . 

construction. To these growing communities, 
the railroad afforded the opportunity to ship out the com- 
modities which they produced, and to bring in the goods 
which they needed. 

This enthusiasm was, however, short-lived. The rail- 
roads developed with even greater rapidity than had been 
What evils anticipated ; and, with their development, 
crept in. came an increase in monopoly power upon which 
railroad enthusiasts had not counted. To be sure, the 
railroads had their advantages ; but the extortionate rates 
and the discriminations between shippers and towns more 
than offset the increased commercial facilities which the 
railroads afforded. 

Consequently, a storm of indignant protest was directed 
against railroad activities. Instead of encouragement, 
Thg they now received strong condemnation. By 

changed 1870, the cry against extortionate rates was com- 
mon in all parts of the country, but particularly 
in the agricultural states of the newly developing Middle 
West. Stringent state laws were passed; but, since the 
railroads were engaged in interstate business, they well 
knew that attempts of individual states to regulate their 
activities would prove ineffectual. Some form of federal 
regulation therefore became imperative. 



Regulation of Railroads 287 

The Interstate Commerce Act. — In 1887 this situation 
culminated in the passage of the famous Interstate Com- 
merce Act, which was directed at interstate pas- Main pro- 
senger and freight traffic carried by railroad or visions - 
by railroad and water. This Act of 1887 includes five main 
provisions: (1) unreasonable or extortionate rates were 
prohibited ; (2) discriminations between persons, places, 
and commodities were made illegal ; (3) fares and rates 
were to be made public ; (4) common carriers were not to 
charge or receive a greater rate in the aggregate for trans- 
porting passengers or freight under substantially similar 
circumstances and conditions, for a shorter than for a 
longer distance, over the same line, in the same direc- 
tion, the shorter being included within the longer dis- 
tance; (5) pooling transactions between railroads were 
prohibited. 

In order to enforce this law, a Commission consisting of 
five members, appointed by the President with the consent 
of the Senate, was created. Subsequently the Commis 
number of commissioners was increased to seven sion's 
and the term of office fixed at seven years. The pov 
Commission was empowered to investigate rates and 
alleged discriminations, and, where necessary, to bring suit 
before the courts. Orders issued by the Commission were 
not binding, should the common carrier, against whom the 
orders were issued, choose to appeal to the courts. Where 
an appeal was taken, the Commission and the carrier went 
through the regular process of suing and being sued, and 
the decision of the court was final. 

The provision regarding unreasonable and extortionate 
rates was based upon the English common law against 
extortion. The discriminations between persons, places, 



288 American Economic Life 

and commodities had grown up with the railroad industry. 
By charging lower rates to one shipper than to another, the 
railroad determined which of the two should 
criminations remain in business; by giving more favorable 
were pro- rates to one town than to another, the railroad 

hibited. 



determined which town should advance com- 
mercially ; and by arranging the rates of two commodities, 
such as flour and wheat, the railroad determined whether 
wheat should be shipped from the wheat fields to Minne- 
apolis and there ground into flour, or, whether it should 
be shipped from the wheat fields to the flour mills of the 
Eastern coast. In any one of these cases, the railroad was 
an arbiter possessed of despotic power. Had it proved a 
benevolent despot, all might have been well; but, unfor- 
tunately, the use made of this power was in many cases 
disastrous to the parties concerned. 

The publication of rates required by the new law gave 
all an opportunity to secure the same terms from the rail- 
other roads ; while the " long and short haul " clause 
results. was armec i against the abuse of granting a rate, 
from one city to the next city, lower than the rate between 
an intermediate small town and one of the cities in ques- 
tion. In an attempt to stimulate competition, pooling was 
prohibited. 

This last provision regarding pooling was perhaps the 

most difficult for the railroads to obey. Since so many 

restrictions had been imposed upon them, pool- 

The defects. . f *\ * 

ing seemed to be the only method 01 agreement 
left to the railroads. When deprived of this, they were 
forced into combination. Another defect was the limited 
power given to the Interstate Commerce Commission. 
To remedy this, subsequent legislation was enacted. In 



Regulation of Railroads 289 

all the subsequent acts, however, the principles underlying 
the original law have been generally maintained. 

Later Legislation. — In 1890, the Sherman Anti- trust 
Law was passed. Although the primary purpose of this 
act was to break up industrial combinations, _ 
certain judicial decisions have been responsible Anti-trust 
for applying this law, to a limited extent, to the 
railroads. When pooling was declared illegal in 1887, 
the railroads entered into certain associations for the pur- 
pose of making rate agreements. In 1897, the Supreme 
Court declared these agreements illegal because they vio- 
lated the Sherman Anti-trust Act of 1890. Again, in 1904, 
the Supreme Court, on the same grounds, ordered the 
dissolution of the Northern Securities Company, a holding 
company, organized for the purpose of holding the capital 
stock of the Great Northern, Northern Pacific, and Bur- 
lington systems, the first two of which were competing 
systems. Furthermore, in 191 2, a similar decision dis- 
solved the merger of the Union Pacific and the Southern 
Pacific railroads, because the former held indirectly forty- 
six per cent of the stock of the latter company. 

At the opening of the twentieth century, through the 
influence of President Roosevelt, Congress passed more 
specific railway legislation. In this manner, the 
Act of 1903, known as the Elkins Law, increased 
the effectiveness of the Interstate Commerce Commission 
by making a corporation as well as its agent liable to prose- 
cution; by increasing the penalties imposed under the 
original Interstate Commerce Act; by permitting the 
Commerce Commission to secure injunctions from the 
United States Circuit Courts ; and by directing the Attor- 
ney General to prosecute under the act. This law expedited 



290 American Economic Life 

the work of the Commission by permitting an appeal, 
in interstate commerce cases, to be made more directly 
to the Supreme Court. 

A law passed in 1906 increased the administrative power 

of the Commission by permitting it to revise railway rates. 

Up to that time, the Commission could only 

Act of 1906. 

declare that a certain rate was unreasonable. 
Under the new law, it might state what rate was reasonable 
by fixing a maximum rate. In addition, its authority 
was extended to all express, sleeping car, and pipe line 
companies doing an interstate business. The law made 
further provisions which enabled the Commission to secure 
uniform accounting. 

In 1 9 10 additional railroad legislation created a special 

Commerce Court in which railroad cases were to be tried. 

Sometimes friction had prevailed between the 

Act of 1910. ... .. 

regular courts of justice and the Interstate Com- 
merce Commission ; and the latter body, which had no 
status as a court, was subject to petty annoyances and 
delays. It was hoped that this new court would, therefore, 
facilitate the execution of the findings of the Commission. 
However, the painful experience of the short-lived Com- 
merce Court proved otherwise, and, in 1913, this Court 
was abolished. 

When the United States became involved in the World 
War, it was necessary to establish a unified control over 

the chief transportation agencies of the country, 
regulation: Accordingly, on January 1, 1918, the President 
Government of the United States placed the railroads of the 

operation. . it • -!->.• r^ 

nation under the direction of the Director Gen- 
eral of Railroads. For a period of twenty-six months the 
railroads were operated by the United States government. 



Regulation of Railroads 291 

About the same time the government took over the control 
of the telegraph and telephone lines of the country. The 
exigencies of war made it absolutely necessary for the 
government to operate the roads in order that troops might 
be speedily dispatched abroad, and that priority of trans- 
portation might be given to such absolute necessities as 
wheat, coal, and ammunition supplies. During this period 
of government operation the railroads performed an heroic 
service for the nation; but, when it was accomplished, 
they found themselves sorely in need of capital to replace 
the rolling stock and freight facilities neglected during that 
period. 

On March 1, 1920, the railroads were returned to private 
ownership under the provisions of the Esch- Cummins 
Act. According to this act the Interstate Com- 

~, . . . Act of IQ20. 

merce Commission remains the keystone of the 
arch of railroad legislation, and is given still greater gov- 
ernmental control over the railroads. This is accomplished 
by centering further authority and responsibility in the 
Commission, by requiring this body, from time to time, to 
determine and publish what percentage of railroad property 
values, i.e. what dividend, constitutes a fair return for 
the investors, and to adjust rates so that the efficient roads 
at least will be able to earn that much for their owners and 
creditors. The act itself provided how much this " fair 
return " was to be for the first two years of private restora- 
tion, namely, five and one-half per cent, with the promise 
that the Commission might during that time allow, in its 
discretion, an extra one-half per cent toward capital ex- 
penditures. Furthermore, the Commission was instructed 
to formulate plans for the consolidation of the railroads 
of the country into a limited number of systems, so that 



292 American Economic Life 

the financially weaker roads might profit by consolidation 
with the larger and more prosperous roads. The Com- 
mission was also given full powers regarding car service, 
joint facilities, new construction and abandonment of 
roads, priority and embargo regulations, and new methods 
of financing. 

The Act of 1920 provides further for the creation of a 
revolving credit fund of $300,000,000 ; it introduces the 
principle of profit sharing with the government, and in- 
cludes a complete system for the settlement of labor dis- 
putes, embracing local adjustment boards and a central 
Railroad Labor Board. The act introduces the principle 
of profit sharing by allowing the government half of the 
profits in excess of six per cent which the railroads may 
earn. The provisions regarding the labor boards are 
exceedingly important. The act specifically creates a 
Railroad Labor Board of nine members, representing 
equally the workers, the managers, and the public, appointed 
by the President with the approval of the Senate, from lists 
of six names each, in the case of workers' and managers' 
nominees, submitted to him by the parties of interest. 
The Railroad Labor Board not only deals with appeals, 
but also has powers of original initiative. It relies upon 
full publicity for the enforcement of its decisions. 

The problem of railroad regulation is doubly significant. 
It is necessary of solution not only for itself, but also for 
importance ^e P ur P ose °f showing the method of govern- 
ed regu- mental procedure in regard to properly control- 
ling all forms of large scale production. Trans- 
portation agencies enjoy such a monopolistic position that 
they can practically determine the welfare of individuals, 
of communities, and of industries. Since it is antagonistic 



Regulation of Railroads 293 

to social welfare that such great power should rest uncon- 
trolled in the hands of private individuals, society, through 
proper legislation, must protect its own interests while 
duly regarding the rights of its individual members. 
If, therefore, the nation succeeds in solving the rail- 
road problem, the experience so acquired may be ap- 
plied not only to the solution of questions relating to 
public utilities, but also to similar problems of monopolistic 
production. 

That the attitude toward business is tending in this 
direction is seen in the establishment of the Federal Trade 
Commission, and in the authority given to the The 
Interstate Commerce Commission, in 1914, to outlook - 
enforce the Clayton Anti-trust Act so far as it applies to 
common carriers. Further evidence of the intention of 
the government to control monopoly is found in the exten- 
sion of the powers of the Interstate Commerce Commission 
not only over steam railways, but also over electric rail- 
ways, telegraph, telephone, and cable companies, and to 
some extent over water carriers ; in prohibiting interstate 
railways from having interests in competing water carriers ; 
and in forbidding railroad companies engaged in interstate 
commerce from transporting goods, other than timber and 
its products, which have been mined or manufactured under 
the authority of the railroad companies concerned. When 
we consider, therefore, the progress attained by the United 
States, since the opening of the twentieth century, in this 
direction alone, the eventual regulation of monopolistic pro- 
duction in all its forms seems assured. 



294 American Economic Life 

QUESTIONS FOR RECITATION 

i. Explain the power of Congress over commerce. Show its 
significance. 

2. Why did the Articles of Confederation prove unsatisfactory? 
How was this defect remedied ? 

3. How did Congress first exercise its power over commerce? 
What effect had the invention of the steamboat in this direction ? 

4. When the steam railroad first appeared, how was it favored? 
Why? 

5. How did it afterward abuse its privileges? What demand 
grew out of this abuse ? 

6. State the main provisions of the Interstate Commerce Act. 
Show why each was necessary. 

7 . What are rebates ? Why are such discriminations made illegal ? 

8. State the original powers of the Interstate Commerce Com- 
mission. Show how these powers were successively enlarged by 
(1) the Act of 1903, (2) the Act of 1906, and (3) the Act of 1920. 

9. When pooling was declared illegal, to what did the railroads 
resort and for what purpose ? 

10. Explain clearly how the Sherman Anti-trust Act was applied 
to railroad combinations. Give at least two examples. 

11. When railroad mergers are dissolved by order of the court, 
what are the practical results of such action ? 

12. Why was the Commerce Court abolished? 

13. Why was it necessary for the United States government to 
operate the railroads during the World War? To whom was this 
operation intrusted ? 

14. What were the effects of government operation ? Was this an 
experiment in socialism? 

15. When and why were the railroads returned to private owner- 
ship and management ? 

16. Explain the main provisions of the Esch-Cummins Act of 
1920 in regard to (1) the powers of the Commission, (2) the "fair 
return" provision, (3) the government profit sharing plan, and 
(4) the method of settling labor disputes. 

17. What restrictions are placed upon railroads with regard to 
(1) commodities transported, (2) shipping interests ? 



Regulation of Railroads 295 

18. Why is the solution of the railroad problem vital to national 
welfare ? 

19. What is likely to be the future of big business in this country? 
State your reasons. 

PROBLEMS FOR DISCUSSION 

1. Why does the question of the control of the railroads in the 
interest of the public present especial difficulties in America? 

2. Has the government built and operated railroads successfully 
in any country? Give examples. 

3. Do you think the United States government should own the 
railroads in this country now? Give reasons. 

4. Who is responsible for the present large number of railroad 
accidents — the railroad, the public, or the employee? Why? 

5. Is federal control superior to state control of railroads? Ex- 
plain fully. 

6. What causes led to the passage of the Interstate Commerce 
Law? 

7. What were the leading advantages of the law? 

8. In what respects was the law ineffectual? 

9. How have the provisions of the original Act of 1887 been 
strengthened by later legislation ? 

10. Discuss the value of uniform accounting. 

11. What is pooling, and why was it made illegal? 

12. Would all rates be reasonable and just if made on the basis 
of distance only ? Explain your answer. 

13. Has the Interstate Commerce Commission power to fix rates? 

14. Give the arguments for and against government ownership 
of railroads. 

15. To what extent has the Federal government control over com- 
merce within a state? 

16. Of what offense was the old Standard Oil Company found 
guilty? Why was this extremely anti-social? 

17. On what basis should railroad capitalization be determined? 

18. What are the limitations of government control over "big 
business"? 



296 American Economic Life 



SUPPLEMENTARY READING 

Ely, R. T. Outlines of Economics, Chap. XXVII. 
Hammond, M. B. Railway Rate Theories of the Interstate Com- 
merce Commission. 
Interstate Commerce Commission. Annual Reports. 
Johnson, E. R., and Huebner, G. G. Railway Traffic and Rates. 
Merritt, A. N. Federal Regulation of Railway Rates. 
Noyes, W. C. American Railroad Rates, Chap. IV. 
Vrooman, C. S. American Railway Problems. 
World's Work. April, 1920. 



CHAPTER XXXI 

Efficiency in Production 

I. Factors of production 

i . The factor of resources : 

a. America's advantages 

b. The great danger 

c. The law of diminishing returns 

d. The effect of war 

e. The remedy 

2. The factor of labor : 

a. Character of the people 

b. Labor's rate of increase 

c. Labor's efficiency 

d. Effects of war 

e. The outlook 

3. The factor of capital : 

a. Its early abundance 

b. Its law of increase 

c. Effect of war 

d. The solution 

4. The factor of management : 

a. Its modern importance 

b. Its future development 

II. Kinds of societies 

1. Retrogressive societies 

2. Static societies 

3. Dynamic societies 

Having examined the factors at work and the typical 
fields of industrial activity in the production of wealth in 
the United States, it is well to summarize now the condi- 

297 



298 American Economic Life 

tions of American production and to attempt to arrive at 
some conclusions regarding efficiency in American economic 
life. 

Factors of Production. — So far as the bases of produc- 
tion are concerned, we have long since seen that the funda- 
The factor mental thesis of the economist is that all pro- 
of resources: d uc tion depends, in the last analysis, upon the 
harmonious union of the requisites of productive enterprise, 
that is, upon the successful utilization of the land, labor, 
and capital resources of society. We have further seen 
that, in the period following the Civil War, the organiza- 
tion of industry in the United States attained such perfected 
development as to render the element of managing ability 
a vital factor in all the more complicated industrial wealth- 
producing activities of the American people. Although 
this last element depends upon some form of combination 
of the more fundamental factors of production, its separate 
treatment, in the more advanced stages of national eco- 
nomic development, is necessary to a complete compre- 
hension of the productive process. Just as managing 
ability and, before that, capital were the latest productive 
elements to appear in industrial society, so natural resources 
and labor were the primary and original factors of early 
production. These two are co-equal in importance; for, 
without each, no creation of economic utilities is possible. 
From the standpoint of production, national prosperity 
is dependent upon the existence of those natural resources 
summed up in the word " land," and upon the application 
to this land of an intelligent and adequate supply of labor. 
What conclusions, then, may we draw, in these respects, 
regarding the possibilities of continued national prosperity 
in the United States? 



Efficiency in Production 299 

America's advantage in the field of natural resources is 
well known. To realize again the significance of this 
truism, we have but to recall the great extent America's 
and variety of soil and climate enjoyed by the adva ^ ta ses. 
United States, the rich mineral deposits of the land, the 
forest areas still preserved, the possibilities of its water 
resources, together with the great system of waterways, 
harbors, and coastal advantages inherent in the land. 
Because of these tremendous advantages, the United 
States has been able, in the course of half a century, to 
leap to the forefront of nations in the production of coal, 
iron, steel, and other raw materials of industry, as well as 
in the annual output of corn, wheat, cotton, lumber, and 
other agricultural products. The very youth and power 
of the land have redounded, not only to the credit of the 
nation, but to that of the entire civilized world. 

But nations, like youths, cannot glory forever in an 
inexhaustible fund of natural energy. Since the found- 
ing of the nation, the resources of the country The great 
have been steadily utilized. Over one-half of dan & er - 
the land originally belonging to the Federal government 
has been practically given away to individuals and cor- 
porations for development. These public lands have 
been granted for the endowment of free schools, for the 
use of railroads and other internal improvements, and for 
homesteads for the support of the landless. The amount 
of " free land," therefore, in America is steadily declining ; 
and, of course, much of the land which remains is inferior 
in productive capacity to that which has been utilized. 
We must exclude from this category, however, many lands 
rich in natural resources which are still unappropriated, 
notably the 368,000,000 acres of unappropriated public 



300 American Economic Life 

land in Alaska. Aside from these Alaskan lands, there 
were, in 1909, 363,300,000 acres of unreserved and unappro- 
priated lands belonging to the United States government ; 
while 571,600,000 acres had been turned over to individuals 
and corporations, 153,500,000 acres had been granted to 
the states, and 324,500,000 acres had been reserved for 
forests, parks, and other public purposes. Up to that 
time, the United States had been disposing of its public 
lands — exclusive of those in Alaska — at the rate of about 
fifteen million acres a year. Just how long the remaining 
public lands of the United States will hold out is, therefore, 
a matter of grave concern. 

It will readily be seen that this gradual exhaustion of 
public lands may have a marked effect upon the future 
Law of welfare and prosperity of the nation. In fact, 

diminishing some writers have already attributed the exist- 
ence of poverty in the United States to this pri- 
vate appropriation of public lands. Furthermore, we have 
seen that land itself, after a certain point has been reached 
in its cultivation, tends to yield a diminishing return. 
That is to say, land tends finally to yield a smaller relative 
return in proportion to the increased amounts of labor 
and capital applied to it. Has this point been reached in 
the cultivation of land in the United States? Certainly, 
in some respects, there is considerable room for speculation 
on this question. However, if we consider the natural 
resources of the United States as a whole, and the ingenuity 
and inventive genius of the people in combating land's 
diminishing tendency, we may venture to assert that many 
years will elapse before this law grips all returns from 
natural agents. On the other hand, there seems to be 
recurring indications of the operation of this law in par- 



Efficiency in Production 301 

ticular directions. For example, the increased cost of pro- 
duction of coal and oil and the general rise in prices follow- 
ing the World War in the United States have been ac- 
counted for in part on this basis. However, it is impossible 
to arrive at any definite and accurate conclusion in this 
regard, because such varying estimates have been given 
respecting the available supply of our natural resources. 
For example, although many people have been accustomed 
to think of our available coal supply as lasting only another 
hundred years, an estimate of the United States Bureau 
of Mines in 1920 placed the supply of minable coal in the 
United States at 3,553,637,100,000 tons, or enough to last 
at the present rate of consumption for 7000 years. 

Of more direct bearing upon the question of America's 
natural resources is the effect of war. The World War 
forced the productive process in the United Effect of 
States to its utmost limit. Never before, in the war - 
same length of time, had its volume of production in agri- 
cultural products and in certain raw materials of industry 
been so great. In many respects the nation was forced 
not only to support itself, but to feed and supply a large 
proportion of European peoples. All temporary consider- 
ations of possible future needs were thrown to the winds. 
Whatever the immediate cost in natural resources the war 
had to be won. As a result, the nation suffered, at the 
close of the war, from a partial exhaustion of natural 
resources. Millions of dollars' worth of agricultural prod- 
ucts and of mineral wealth had been sacrificed on the altar 
of Mars. The reaction of war was found in diminished 
natural resources. 

There is only one remedy for the ravishing of natural 
wealth. This is found in a return to the ideals of conserva- 



302 American Economic Life 

tion. The waste of war must be replaced by the wise use 
of our remaining resources. The perpetuation of the demo- 
The cratic ideal, as against the menace of autocracy, 

remedy. h as b een WO rth a thousand times more than the 
destruction of the natural wealth necessary for its con- 
tinued realization. But the problem of the twentieth 
century is to guide production along the lines of the care- 
ful utilization of America's remaining natural resources. 
Through scientific farming, irrigation, and reclamation, the 
soil must continue to yield an increasing return ; through 
the utmost care and the complete elimination of waste, the 
mineral resources must be husbanded for future genera- 
tions; through the utilization of new forms of power, 
the diminution of coal and oil resources must be offset; 
and, through wise governmental action, land monopoly 
must be checked, and a far-seeing policy formulated for the 
future control and development of America's remaining 
natural resources. 

Of equally vital importance to individual welfare and 

social prosperity is the labor supply of a nation. Natural 

resources are useless without an adequate and 

The labor 

factor: efficient labor force. From our review of the 

Character of process of production in the United States, what 
conclusions may we draw with regard to the 
character, amount, and efficiency of American labor? 
From our examination of the population of the United 
States, we have seen that it developed from a small and 
comparatively homogeneous, compact group of three million 
people in the eighteenth century to an immense, hetero- 
geneous, and diverse mass of over one hundred millions 
in the twentieth century. The present composite character 
of the American people is largely due to the European 



Efficiency in Production 303 

immigration of the past fifty years. The early character 
of the people was that which naturally results from the 
life of the frontier — rugged, individualistic, and adaptable. 
As the frontier gradually disappeared from American life, 
the people became more careless, generous, and wasteful. 
They exploited the natural resources of the country, but 
retained their boundless spirit, energy, and initiative. 

America's development has not lagged for want of labor- 
ers. This increase in population has sometimes been due 
as much to immigration as to the natural in- Labor's rate 
crease in birth rate. In fact we have seen °f™ c r ease - 
that, during the later nineteenth century, the native white 
birth rate gradually declined, and that this decline was 
partially offset by the great number of foreign elements 
coming into the United States. Furthermore, this increase 
in the sum total of population has not been attended, as 
Malthus had predicted, by widespread poverty. In other 
words, population has not outstripped the means of sub- 
sistence. While poverty has existed, the early resources 
of the country were so abundant that the land furnished 
general opportunity for the increased millions to earn their 
livelihood. Labor's rate of increase was not greater than 
the return from the land. Throughout the nineteenth 
century the supply of labor was sufficient to develop the 
land, and the land, in return, was sufficient to support the 
increased population. 

But since millions of this increased labor supply were 
made up of blacks and immigrants, the native white stock 
has been partially weakened. Hence, while the Labor's 
American labor force has steadily increased in e ffi cien °y- 
quantity, it has somewhat declined in uniform quality. 
This fact has had a slight effect upon the efficiency of labor. 



304 American Economic Life 

While, in many respects, certain groups of American labor 
are, to-day, more efficient than ever, there are numerous 
instances of lowered efficiency in our labor force. This is 
probably due to the injection into American life of lower 
European standards, and of ideas and habits of thought 
which are entirely out of harmony with American institu- 
tions. We are apt, however, to exaggerate the importance 
of this element, because we have been so accustomed to 
regard American labor as representing the climax of indus- 
trial efficiency. 

The World War also accentuated the shortcomings of 
labor. From the normal, daily grooves of ordinary eco- 
Effects of nomic life, the American people were suddenly 
war - thrust into the abnormal pursuits of war. As a 

result, the entire industrial system became temporarily 
dislocated. The aftermath of war was felt in a series of 
abnormal conditions. The entrepreneur made enormous 
profits through the sharp rise in prices, and the laborer 
received a corresponding increase in wages. For the first 
time, many laborers began to realize the full economic 
importance of their position and to make persistent demands 
for further wage increases. With the aid of higher wages, 
labor often withdrew temporarily from production. This 
situation naturally resulted in underproduction and in 
still higher prices. At the same time, labor became extrava- 
gant in its consumption of goods, without enlarging the 
volume of production. The labor shortage became acute, 
particularly in agriculture, which suffered greatly as a 
result of the shifting of former agricultural labor to the 
cities after the process of demobilization had been com- 
pleted. 

But labor unrest, at its worst, is only a temporary phe- 



Efficiency in Production 305 

nomenon in American life. Idleness, extravagance, and 
labor disorders are not permanent characteristics of 
Anglo-Saxon peoples. Their method is one of Tke 
compromise and adjustment. The task before outlook - 
the American people is to educate the newer element in 
the population to the point of view possessed by the origi- 
nal stocks. When this is accomplished, there need be 
no fear of revolutionary European doctrines contaminating 
American life through the foreign-born population. Such 
labor radicals as preach the doctrine of direct action, sabot- 
age, and confiscation of capital have no place in American 
civilization. They may thrive in the sickly soil of op- 
pressed Europe, but wither when transplanted to the pros- 
perous land of America. As compared with foreign coun- 
tries, therefore, the United States has, on the whole, a 
splendid asset in its laboring population, which is not only 
increasing in number, but inherently capable, through 
proper guidance, of attaining the highest industrial effi- 
ciency. 

If the gospel of work and conservation is unceasingly 
practiced in the United States, this nation, so far as the 
primary factors of production — land and labor 
— are concerned, will be able to realize the ideals of capital: 
of individual prosperity and social welfare, its early 

T-. - , , , . . . abundance. 

Because of the past reckless appropriation of 
natural resources and the later acquisition of unassimilated 
labor elements in the population, the future prosperity of 
America may not be so easily attainable as that of pioneer 
days ; but this fact does not mean that future generations 
of Americans will be denied national prosperity. It only 
means that the United States, in a sense, stands at the 
parting of the ways, — that waste must be replaced by 



306 American Economic Life 

conservation, that labor unrest must be succeeded by in- 
dustrial stability. So, too, with regard to the capital 
resources of America. This factor has been abundant in 
the past, and, through the elimination of extravagant 
spending and a normal increase in production, capital will 
continue to be more than sufficient to meet the require- 
ments of future production. We have seen that, through- 
out the nineteenth century, the increase in capital — both 
in capital goods and capital value — was one of the strik- 
ing characteristics of American civilization. So abundant 
was this supply of capital that it existed in all kinds of sur- 
plus wealth — factories, locomotives, ships, raw materials 
of industry, and countless other goods used to assist in fu- 
ture production. 

Since capital is the result of the application of labor to 
land, it is more easily replaced, when once destroyed, than 
its law of is either of the primary requisites of production. 
increase. " Capital is an intermediate product of nature 
and labor, nothing more. Its own origin, its existence, 
its subsequent action, are nothing but stages in the con- 
tinuous working of the true elements, nature and labor." 
The ability to increase capital is, therefore, not beset by 
any intrinsic difficulties. Its law of increase depends, when 
once it is produced, upon the amount of wealth which can 
be saved and upon the disposition to save. Without ade- 
quate and efficient production, there can be no surplus of 
production over consumption to furnish the starting point 
for the accumulation of capital. When extravagant con- 
sumption outruns production, or when underproduction 
results through inefficient or inadequate labor resources, 
no fund for capital development is possible. Hence the 
first requisite for the increase of capital is efficient produc- 



Efficiency in Production 307 

tion. When a surplus is once assured, the capital increase 
depends (1) upon the amount of this surplus, that is, the 
actual amount which can be saved without lowering the 
normal standard of living ; and (2) the disposition to save 
on the part of the producer. Throughout the nineteenth 
century, both these requirements were capable of fulfill- 
ment by the American people. 

It is interesting to note the effect of war upon the develop- 
ment of capital. The very essence of war is the destruction 
of economic utilities. Every one is familiar with ^fect of 
the fact that billions of dollars of European war - 
wealth were destroyed by the World War. The resulting 
shrinkage of European capital was perhaps unparalleled 
in human history. How did this cataclysm affect American 
capital? Its effect was two-sided. In the first place, 
billions of dollars of goods were sent to Europe to be der 
stroyed in the great conflict. This wealth was not being 
used to produce more wealth, but was being immediately 
consumed. Had a similar amount of wealth been produced 
and not later destroyed, the capital fund of the world would 
have been enormously enlarged during that period. While 
the war was in progress, however, the true situation was 
temporarily obscured, because the war's immediate effect 
was not felt on account of the great reserves of production 
in the United States. Furthermore some of the goods 
produced during that period in this country, such as ships, 
were not actually destroyed, but really served to increase 
the fund of capital. In the second place, the ultimate 
effect of the World War upon our capital supply was not 
immediately perceived, because the volume of money in 
the United States rapidly increased during that period. ' 
This increase was due (1) to the influx of European gold 



308 American Economic Life 

in payment of American goods shipped abroad, and (2) 
to the inflation of American currency through the expansion 
of credit and the issuance of Federal Reserve notes. Of 
course, this inflation of currency and underproduction of 
capital goods was accompanied by the phenomenon of high 
wages and still higher prices. So great was the increase 
in the volume of money that savings bank deposits, in 1918, 
reached a sum total of nearly five and one-half billions of 
dollars. The total capital accumulations of the United 
States in that year were estimated at nearly $22,000,000,000 
by Professor David Friday, who further stated that " in 
1 91 8 approximately thirty per cent of our national income 
was saved." 

The World War, however, served to bring out the dis- 
tinction between money and goods. In 1920, there were 
The in the United States $4,000,000,000 in paper 

solution. money, or three times that of the pre-war period ; 
and of this amount almost $3,000,000,000 were in Federal 
Reserve notes. At the same time the war disorganized 
many of the normal and regular channels of American 
production. But it is an economic law that a nation, in 
order to enjoy industrial stability, must maintain a proper 
relation between the volume of currency and the volume 
of production. Mere abundance of money means nothing, 
while shortage of essential goods means everything, to the 
prosperity of a nation. Under such circumstances, it is 
necessary to reestablish economic equilibrium. Through 
the gradual contraction of credit and the retirement of 
government notes, inflation ceases and speculation is curbed. 
At' the same time the fund from which capital is actually 
drawn becomes enlarged by increased production, and by 
the practice of thrift, instead of extravagance, in the con- 



Efficiency in Production 309 

sumption of goods. The real basis of capital is not money 
and credit, but goods and material values. 

Another element to be considered in measuring efhciency 
in production is the question of business organization or 
management of industry. The three factors of The factor 
production must be scientifically mobilized for ^ e ™ t a . nage ~ 
purposes of production. In modern industrial i ts modem 
society two or three of the factors are often im P° rtance - 
under the control of one management. For example, in 
large scale production the owners of the capital are often 
the owners of the land. To this combined control of land 
and capital there is then added the management of the 
labor force required in the process of production. We 
have seen that the commander of these industrial forces 
has been described as organizer, entrepreneur, or captain 
of industry. In America, the development of managing 
ability has become so important and striking that the 
entrepreneur is entitled to separate consideration as a 
factor of production. Upon this element the success or 
failure of the enterprise often depends. More than this, 
the investments of millions of stockholders are dependent 
upon the sound judgment and business management of 
the entrepreneurs. It is this factor that is largely respon- 
sible for the development of the great American trusts which 
have characterized and assured the industrial supremacy 
of the United States. 

Consequently, the future development of business or- 
ganization is of the greatest importance to American so- 
ciety. Is the future management and organiza- Itsfuture 
tion of American industry likely to be beneficial development. 
or detrimental to the welfare of the American people ? The 
answer to this question will depend upon our ability to 



310 American Economic Life 

develop individual initiative in harmony with the public 
good. The experience of the railroads under government 
operation seems to point to the fact that American business 
enterprises thrive more successfully under the influence of 
private management and individual initiative. In our 
present stage of political development, industry does not 
seem to be so well organized and managed when directly 
operated by governmental authorities. The most effective 
management of industry seems to be linked with motives 
of personal gain and individual interests. But this fact 
of human nature does not mean that private gain is to be 
the sole or even the chief end of cooperative enterprise. 
On the contrary, the public must be protected from the 
unrestrained exercise of individual power, when that power 
comes into conflict with the good of the community. The 
monopoly power of individual or corporate management 
must be checked in the interest of the public good. 
Through some form of social control, — through govern- 
ment regulation, — the element of management in pro- 
duction must be so directed that the interests of the pub- 
lic will be safeguarded without impairing the efficiency 
of industrial organization. 

Kinds of Societies. — We have now concluded the dis- 
cussion of some of the more important problems arising 
Retro- f rom tne production of wealth. Since land, 

gressiye labor, and capital are all necessary to pro- 
duction, the wealth-producing machinery of 
society will depend upon the efficiency of each. The 
greater the productive capacity of each requisite, the 
greater will be the possibilities of national prosperity. 
From this point of view, therefore, one of three things 
may happen in social evolution. In the first place, it may 



Efficiency in Production 311 

happen in an old civilization that population is increasing 
while the other factors of production — land and capital — 
are decreasing. Through loss of land or through soil ex- 
haustion, natural resources may be depleted ; while, through 
extravagance, ignorance, or inefficiency in labor, surplus 
wealth may be destroyed and the capital supply of the na- 
tion exhausted. As a consequence, the production of wealth 
gradually decreases, and when this condition becomes 
general throughout the nation, the society becomes retro- 
gressive. The path of history has been strewn with such 
decaying civilizations. 

In the second place, a society may be stationary. For 
centuries, perhaps, the methods of utilizing natural resources 
and of developing capital may have remained sta ti C 
practically unaltered, while the population may societies - 
have increased in numbers, but not in efficiency. When 
this situation exists, it is impossible to satisfy the higher 
wants of an advancing civilization, because the volume of 
production remains proportionally the same throughout 
the passing of the centuries. The weight of custom and 
tradition prevents the development of efficient methods 
of production, and thereby obstructs the forward, progres- 
sive movement of society. For centuries, China has been 
a classic illustration of a static society. It is possible, how- 
ever, that the twentieth century may see China freed from 
enslaving tradition, and, thereby, place this ancient civiliza- 
tion in the commanding position warranted by its natural 
resources. 

Still another possibility is open to society. A civiliza- 
tion endowed with rich natural resources, an efficient and 
adequate labor force, and an abundance of ever increasing 
capital may progress rapidly in the production of material 



312 American Economic Life 

wealth. Because of the efficiency of the factors of produc- 
tion, the wealth of the community may be constantly in- 
Dynamic creasing. In this manner, the higher wants of 
societies. man ma y continue to expand, and their satisfac- 
tion will be assured by the increased production. Such 
a dynamic civilization presents infinite possibilities for 
individual prosperity and social welfare. Our study of 
production in the United States shows conclusively the 
dynamic, progressive character of American society. 

QUESTIONS FOR RECITATION 

i. Why is it important to emphasize efficiency in production? 

2. Contrast the importance of the primary with the secondary 
factors of production. Give examples. 

3. Contrast the natural resources of the United States with those 
of England ; with those of Spain ; with those of Russia ; with those 
of Italy. 

4. In which of these countries, and in what occupations, is the 
law of diminishing returns operating ? Give reason in each case. 

5. Of what national policy is the United States feeling the effects 
to-day ? State the advantages and disadvantages of this policy. 

6. Give some idea of the amount of unappropriated public lands 
in the United States ; of the amount appropriated ; of the amount 
reserved. Where are the present unappropriated lands chiefly 
found ? 

7. How do you account for the shrinking of our natural resources ? 
Explain the effect of the World War upon them. What is the 
remedy ? 

8. Contrast the early character with the later character of the 
American people. How do you account for the change ? 

9. Is the United States likely to suffer from a permanent short- 
age of labor ? What makes you think so ? 

10. Discuss the efficiency of American labor, 
n. Explain clearly the effects of the World War upon labor, 
both in this country and abroad. 



Efficiency in Production 313 

12. What is the best method of curing labor troubles in the United 
States? Why? 

13. Why has capital been abundant in the United States ? What 
will its future increase depend upon ? Is it likely to increase ? 

14. Why is it necessary to emphasize production on the one hand, 
and thrift on the other hand ? 

15. Discuss the effects of the World War upon the supply of 
capital : (1) in Europe, (2) in the United States. 

16. Was the capital increase during this period mostly in capital 
goods or in capital value (money)? Why? What was the effect 
of this ? 

17. What dangers result from inflation? How may inflation be 
remedied ? 

18. Discuss the importance of business management as a factor 
of production. Show its origin. 

19. Upon what will its future value depend? Is it likely to in- 
crease or decrease in importance ? Why ? 

20. Define three kinds of societies, showing in each case the 
interrelation of the factors of production. 

PROBLEMS FOR DISCUSSION 

1. May production, as well as consumption, be a measure of 
welfare ? How ? Which is the better measure ? Why ? 

2. When production is great enough to insure national pros- 
perity, does individual welfare necessarily follow? 

3. Explain how individual prosperity is affected by the manner 
in which wealth is distributed throughout society. Give examples. 

4. Name a country in which great production and glaring in- 
stances of poverty are found. Account for this situation. 

5. Cite a nation in which there is great production and general 
prosperity. State the reasons for this. 

6. Give examples of retrogressive and static societies. Show 
why in each case. 

7. What is a dynamic society ? Give an illustration from Europe 
and explain clearly. 

8. How would you classify Japan ? India? Why? 

9. Did Malthus believe in the continued existence of dynamic 
societies ? Why not ? 



314 American Economic Life 

10. What theories handicapped the classical school of economists 
in their views regarding dynamic societies ? How ? 

11. From the standpoint of production, discuss the future possi- 
bilities of American civilization. 



SUPPLEMENTARY READING 

Annals of American Academy of Political and Social Science, January, 

IQIQ. 

Carver, T. N. Principles of Political Economy, Chap. XV. 

Clay, H. Economics, Chaps. Ill, V. 

Ely, R. T. Outlines of Economics, Chap. IX. 

Mill, J. S. Principles of Political Economy, Chaps. VI-X. 

Parlin, C. C. Basic Facts of Prosperity (1920). 

Patten, S. N. Dynamic Economics. 

Seager, H. R. Introduction to Economics, Chap. VIII. 

Taylor, F. W. Principles of Scientific Management. 



PART FOUR 
PROBLEMS OF EXCHANGE 

CHAPTER XXXII 

Value and Price 

I. Value 

i. Meaning of exchange 

2. Nature of value : 

a. Its popular meaning 

b. Requisites of economic value : 
(i) It arises from utility 

(2) It involves scarcity 

c. Relation between value and wealth 

d. Relation between utility and usefulness 

3. Forms of economic value : 

a. Value in use : 

(1) Meaning 

(2) Examples 

b. Value in exchange : 

(1) Meaning 

(2) How determined 

(3) An illustration 

II. Price 

1 . What price is 

2. How price is determined : 

a. When competition is free 

b. When competition is not free 

3. The conclusion 

31s 



316 American Economic Life 

Value. — Leaving now the subject of the production of 

wealth, we pass on to a consideration of some of the more 

important problems connected with its exchange. 

Meaning sr tr o 

of Wealth would be of little value if, after it had 

exc ange. ^^ produced, it were not transferred from 
one individual to another. It will readily be seen that 
the complex conditions of modern industrial life, due to 
separation of employments and division of labor, make it 
impossible for one man to produce all the economic goods 
that he requires for his own consumption. The process 
by which he secures goods from others in return for his 
own goods is known, in economics, as the exchange of 
wealth. In advanced civilizations the welfare of indi- 
viduals and of society is clearly dependent upon this pro- 
cess of exchange. 

Goods would not be desired and exchanged for one an- 
other unless they possessed value. In a popular sense, 
its nature: tne term " va l ue " * s given a wide application. 
Popular We speak of the value of an individual to a 
meaning. community, or of the value of an educational or 
of a religious system to society. In this sense, the term 
refers to the desirable qualities in the person or institution. 
Consequently we think of " personal values," " educational 
values," and " religious values " — each one of these 
phrases illustrating the general meaning of the term value 
as used in everyday life. 

In economics, however, the term value has a special 
significance which arises primarily from the utility of goods. 
D . ., It will be remembered that " wants " are the 

Requisites 

of economic desires which individuals have for goods, and 
that " utility " is the name given to the want- 
satisfying quality in the good. The presence of utility 



Value and Price 317 

is the first requisite of economic value. Wheat, books, 
steel rails, petroleum — all possess utility because each 
satisfies some particular individual want. Furthermore, all 
these goods are limited in extent. 

But not all goods are so limited ; some are free. Occa- 
sionally goods are so plentiful that, although they have 
utility, they do not possess value in the economic sense. 
For example,, water, a free gift of nature, may or may not 
have economic value. Frequently it has not because it is 
not an economic good, — no one would give something 
upon which he had spent time and effort in exchange for 
it. But to a man adrift on the South Pacific the value of 
drinking water would be inestimable, — he would give any- 
thing in exchange for it. Thus, in addition to utility, 
scarcity is necessary to economic value. 

This analysis of value makes clear the relation between 
economic value and material wealth. It will be recalled 
that wealth, i.e. economic goods, must possess 
three characteristics. In the first place, utility between 
is essential to material wealth ; it is also essential mlue and 

wealth. 

to economic value. Secondly, wealth involves 
the element of industrial effort, that is, labor. This char- 
acteristic of wealth is synonymous with the element of 
scarcity in economic value ; for only free gifts of nature, 
like air, are boundless in extent, and their existence in- 
volves no expenditure of labor or industrial effort. In other 
words, goods are scarce because industrial effort, or labor, 
is necessary to their production. Finally, material wealth 
possesses the quality of exchangeability, which, of course, 
is the very measurement of economic value. Since things 
which are equal to the same thing are equal to each other, 
we find that material wealth is equivalent to economic 



318 American Economic Life 

value. Hence, economic goods and economic value are 
synonymous in meaning. 

It has already been pointed out, however, that utility 
is not synonymous with usefulness. Utility is simply the 
utility and quality in a good which satisfies a want. Now, 
usefulness, [f an individual wants something that is not 
useful, this useless, or even harmful, thing will possess 
utility. A diamond necklace or a box of cigars may, there- 
fore, possess as much utility, and consequently value, as a 
well-furnished house or a nourishing diet. 

We may thus conclude that economic value is the worth, 

without any necessary regard to the usefulness, that is 

attached to material wealth. If, now, we stop to 

Forms of . 

economic consider for a moment, we shall see that this 
worth may be estimated either by the individual 
for his own special use, or by the whole group for purposes 
of exchange. This difference in the method of estimating 
the worth of economic goods gives rise to two forms of eco- 
nomic value : value in use and value in exchange. 

Value in use is purely subjective ; that is, it is simply an 
individual estimate of the worth of a given commodity. 
Value in One individual may value a certain economic 
use. good far more highly than would another in- 

dividual. In this determination of value, personal pecu- 
liarities play a large part. For example, a silver spoon 
that has become an heirloom may satisfy such an intense 
want in an individual that he will value it far beyond its 
intrinsic worth. This individual valuation of the spoon 
is clearly not a measure of its social value. In a similar 
manner, an old and time-honored homestead may be more 
highly valued by the descendant of the original owner than 
by the community at large. While these may be exagger- 



Value and Price 319 

ated cases, nevertheless, it is perfectly true that individual 
valuations are not just estimates of values put upon goods 
by society as a whole. Therefore, economics is concerned 
primarily with the second kind of economic value, — value 
in exchange. 

Value in exchange is a social valuation placed upon an 
economic good by a number of persons. Therefore, in 
determining value in exchange, the good is vaiuein 
looked upon, not from the standpoint of its exch >ange. 
utility to a single individual, but from the point of view 
of its worth to a whole group of people. Thus, value in 
exchange is the social estimate of the worth of an economic 
good and represents, in the words of Professor H. R. Seager, 
the " power of a good to command other goods in exchange 
for itself." 

In estimating this exchange value of a commodity, 
utility and scarcity play the determining parts. Now 
utility, itself, is variable. In discussing this subject 
under the head of consumption, we saw that to the tired 
traveler the utility of the first apple is much greater than 
the utility of the third apple ; and that, in consuming apples, 
man soon reaches a stage when his desire for apples is 
satisfied. The utility of the apple at this point is called its 
marginal utility, and it is upon this marginal utility that 
value in exchange depends. Furthermore, it is not the 
marginal utility of a commodity to a single individual that 
determines its exchange value ; but it is its marginal utility 
to a whole community that is the measure of this value. 
Thus, exchange value depends upon the estimate that 
society places on marginal utilities. 

In determining the exchange value of a given commodity, 
the question of marginal utility depends not only upon the 



320 American Economic Life 

social estimate of its worth, but also upon its scarcity. This 
fact is popularly expressed by saying that the value of an 
economic good varies with the relation of supply and de- 
mand. This, however, is only another way of saying that 
exchange value depends upon marginal utility, because an 
increase in the supply of a commodity means a decrease 
in its marginal utility ; and this, in turn, the demand re- 
maining the same, means a fall in value. On the other 
hand, a decrease in the supply of a good means an increase 
in its marginal utility, and a corresponding rise in value, 
if the demand remains unchanged. From this standpoint, 
therefore, the amount or scarcity of a commodity (supply) 
taken in conjunction with the intensity of its want-satisfy- 
ing quality or utility (demand) determines value in ex- 
change. 

For example, if the demand remains the same and there 
is an increase in the supply of turkeys, their marginal 
utility will decline and their exchange value fall. But if, 
with the approach of Christmas, the demand for turkeys 
increases and the supply remains stationary, the marginal 
utility of turkey will become greater and the exchange 
value higher. This relation between supply or goods, 
on the one hand (scarcity), and demand or wants, on 
the other (utility), is the key to the determination of 
economic value. 

Price. — Since value in exchange is a relation between 
goods, society must devise some accurate method of measur- 
What m g this relationship. Although every economic 

price is. good has the power to command another good 
in exchange for itself, it is necessary to measure the value 
of each good in terms of a standard commodity. In most 
advanced societies, gold is this standard commodity ; and 



Value and Price 321 

money is the common measure of economic values. There- 
fore, price is exchange value expressed in terms of money. 
When, for example, we wish to express the exchange value 
of some commodity, such as a pear, we do so in terms of 
some other commodity which is used as a standard of 
measuring all values. We do not say that the pear is worth 
two apples, but that the pear is worth two cents ; because 
money, not apples, is the standard by which all economic 
values are measured Money thus becomes a common 
denominator of value, and prices are expressed in terms of 
this commodity. 

Under conditions of free competition, buyers and sellers 
meet on a common ground — the market place — and there 
determine price by deciding the value of com- 
modities. The value agreed upon is the price, m in e d: 
and it is expressed in terms of money. The when 
price will depend upon the law of supply and c ™? e f ion 
demand governing value. The seller will look 
at the problem largely from the standpoint of production, 
and the buyer from the standpoint of consumption. This 
method of determining price is still in vogue, to-day, in 
backward and rural communities. In fact, even in some 
civilized European countries, such as Greece and Italy, 
" bargaining " is still resorted to as a method of determin- 
ing prices. Usually, however, in large modern societies, 
the " one price " system has been adopted. That is, the 
seller estimates the value of the good to the community in 
terms of price. If his estimate is correct or nearly so, he 
sells the commodity ; if not, he changes the price to conform 
to the social estimate. Thus, price represents the point 
at which the seller and the buyer meet in their estimate of 
value. 



322 American Economic Life 

From this discussion we have seen how price would be 
determined normally. On the one hand, among pro- 
when ducers there would be free competition, and, 

competition on the other, among consumers there would be 
wants of varying degrees of intensity ; while 
the law of supply and demand would form the backbone 
of the whole process. But conditions are not always as 
here depicted. In fact, in modern industrial society, con- 
ditions of production are continually changing. Com- 
petition gives way to monopoly, and cost of production 
sometimes plays a diminishing part in determining prices. 
Consequently, in this absence of competition, the monopo- 
list fixes the price at a point which affords him the greatest 
monopoly profits. 

Thus price may be viewed from the theoretical, or from 
the practical standpoint. When ideal conditions of free 
The competition prevail, price will tend to fluctu- 

conciusion. a |- e according to cost of production. Under 
these conditions, the theoretical laws of value will really 
determine prices. But, at present, prices are not so 
ideally determined in American society. The development 
of large scale production has tended to curtail competition 
and to strengthen monopoly. Under these conditions, 
prices may be fixed without any necessary regard to cost of 
production. Therefore, if we would understand how prices 
are actually determined, we must investigate to what extent 
monopolistic combinations are prevalent in the United 
States, and the effect of their monopoly power upon 
prices. 



Value and Price 323 

QUESTIONS FOR RECITATION 

1. Explain the importance of exchange to society. 

2. State the popular meaning of value. Give an example. 

3. Name the requisites of economic value. Define each. 

4. Show why both utility and scarcity are necessary to economic 
value. Give examples. 

5. Why is material wealth sometimes defined as "that which has 
exchange value"? 

6. May a useless thing possess economic value? Why? A 
harmful thing ? Why ? 

7. Name two forms of economic value. Define and give an ex- 
ample of each. 

8. Explain clearly the difference between use value and ex- 
change value. 

9. Show how value in exchange is determined — stating the two 
factors in the case. 

10. Explain clearly the effect of supply and demand upon ex- 
change value ; give an example. 

11. What is price? 

12. What is the relation between price and value? 

13. How are prices determined under free competition? 

14. What determines price when competition is not free ? 

15. How are prices determined in the United States to-day? 

PROBLEMS FOR DISCUSSION 

1. Does every good possess economic value? Why? Does 
everything which possesses utility possess economic value? Why 
not? 

2. Have the following value : a gambler's pack of cards, clothes 
of antiquated fashion, opium, air, tobacco ? State reason in each case. 

3. If wealth increases, will there be a greater sum total of ex- 
change value in the community? What is the relation of wealth to 
exchange value ? 

4. Is an encyclopedia wealth ? Among Indians ? Has it value ? 

5. "Whisky is not wealth. It has no permanent value for 
society." In what sense is the term "value" used? 



324 American Economic Life 

6. A mercantile establishment advertises "the best values in the 
city." What is meant here by value? 

7. Could a thing have value unless it was desired? Unless it 
was scarce ? State the reasons. 

8. Draw up a sentence in which value is used in the sense in which 
the economist uses it. 

9. Would a bag of gold have value to a shipwrecked sailor on a 
rocky and deserted island ? Would a loaf of bread ? Why? 

10. Explain the importance of the idea of price to society. 

11. Can all values rise? Can all prices rise? Explain the 



reasons. 



SUPPLEMENTARY READING 



Carver, T. N. Principles of Political Economy, Chaps. XXII, 

XXIII. 
Clark, J. B. Philosophy of Wealth, Chaps. V and VI. 
Clay, H. Economics, Chaps. XIV, XV. 
Ely, R. T. Outlines of Economics, Chaps. X-XI. 
Fetter, F. A. Principles of Economics, Chap. V. 
Marshall, A. Principles of Economics, Book V. 
Mill, J. S. Principles of Political Economy, Book III, Chap. I. 
Seager, H. R. Introduction to Economics, Chap. V. 



CHAPTER XXXIII 

Price and Monopoly 

I. Monopoly power 
i. How measured 

2. How limited 

3. Size not essential 

II. Kinds of monopolies 

1 . Industrial monopolies : 

a. Created by law : 

(1) Through control of natural resources 

(2) Through patents and copyrights 

b. Created by organization 

c. Created by both 

2. Franchise monopolies : 

a. Transportation 

(1) Railroads 

(2) Electric traction 

b. Power and light 

3. Labor monopolies : 

a. Personal monopoly 

b. Monopoly of organization 

4. Public monopolies 

5. Natural monopolies 

6. Conclusion 

Monopoly Power. — At present the factor of monopoly 
is one of the chief elements in fixing price. Popularly, the 
term " monopoly " is applied to any large in- How 
dustrial organization having more or less ex- measured - 
elusive control over its product. But from an economic 
standpoint, an organization is a monopoly only when, 

325 



326 American Economic Life 

through crushing competition and controlling output, it 
is in a position to fix price without regard to the laws of 
value. In other words, a monopoly is an organization 
with the power to fix price above or below a competitive 
level. The only real measure of the existence of monopoly 
is its price-fixing power. 

Observe that while price-fixing capacity is the test of 
monopoly, it does not necessarily follow that the monopoly 
How can fix any price that it chooses. For example, 

limited. if a company had a monopoly of iron ore and 
fixed the price at a prohibitive figure, industry would sub- 
stitute cement for iron to such an extent that either the 
price would not be maintained, or, if it were maintained, 
the product would remain unsold. Thus the power of the 
consumer to substitute one commodity for another limits 
the power of monopoly to fix any price it might desire. 

This power to fix price which determines monopoly may 
relate to the production of a commodity on a very large 
Size not scale or on a very small scale. For example, 
essential. ^he original Standard Oil Company unques- 
tionably had monopoly power, since it had the power to 
fix the price of petroleum and petroleum products above a 
competitive level. The same thing is probably true to-day 
of the manufacturers of plate glass and of the manufacturers 
of print paper. These businesses are very large, and the 
products in which they deal are widely used and of great 
value. On the other hand, a manufacturing company may 
be engaged in the production of articles that are used by 
only a few people, and its possibilities of growth may thus 
be extremely limited. This is the case, for example, with 
the manufacturers of psychological instruments. But 
even here, there is monopoly power. In fact, the demand 



Price and Monopoly 327 

for these instruments is so small that those who make them 
charge for them prices which are out of all proportion to 
their cost of production. In the case of glass and paper, 
the monopoly power is exercised to a limited degree ; in 
the case of psychological appliances, the monopoly power 
is very great, and the monopoly price far exceeds the com- 
petitive one. 

Kinds of Monopolies. ■ — Monopolies may be divided into 
five groups: (1) industrial monopolies, (2) franchise mo- 
nopolies, (3) labor monopolies, (4) public mo- industrial 
nopolies, and (5) natural monopolies. Indus- monopolies: 
trial monopolies may be subdivided into three classes, — 
those created by law, those created by organization, and 
those created by both law and organization. 

Industrial monopolies are created primarily by law. 
They usually base their monopoly power on the control of 
natural resources, and this control is made created by 
possible only through existing forms of prop- law - 
erty law. Thus, the control of natural resources, sanctioned 
by law, is characteristic of many industrial combinations. 
The development of modern industry has taught the manu- 
facturer that his highest effectiveness can be maintained 
only when he has control of all the processes of production, 
from the raw material in the earth to the finished product 
ready for shipment. Such a monopoly control of resources 
is the most effective method of preventing competition, 
because the supply of natural resources is limited and the 
demand for them is always increasing. The International 
Harvester Company, which controls the forests from which 
it cuts the timber and the mines from which it digs the iron 
and coal for the manufacture of its machinery, is typical 
of a great group of integrated industries. Through natural 



328 American Economic Life 

resource monopoly, the great industrial corporations are 
often enabled to fix monopoly prices. 

Patents and copyrights constitute .the second element 
in maintaining industrial monopolies created by law. Al- 
though less permanent than the monopoly of natural re- 
sources, patents and copyrights, while they exist, are more 
absolute. While there are natural resources of many kinds 
in different parts of the country, a patent once secured gives 
to the owner sole right for many years to manufacture that 
particular article. The same thing holds true of copyrights, 
trade-marks, patented processes, and the like. The bread 
formulas of the great baking companies, the cigar labels 
and trade-marks of the cigar manufacturers, the patented 
processes for making paint and other similar products, are 
all illustrations of a monopoly power based upon this form 
of legal control. 

On the other hand, organization may be the primary 
factor in developing an industrial monopoly. The Ameri- 
Created b can * ce Company, for example, is dealing in a 
organiza- product which may be secured almost any- 
where in the northern part of the United 
States ; yet it is able, in certain cities, to charge what ap- 
pears to be a monopoly price because it controls the ma- 
chinery of ice delivery in those places. In the same way, 
largely through the control of the retail tobacco business, 
the original American Tobacco Company was enabled for 
many years to charge monopoly prices. 

In most of the industrial combinations, however both 
law and organization play a part. The United States 
Created by Steel Corporation depends upon its natural 
both. resources, upon its formulas, and upon its 

effective business organization. Although this business 



Price and Monopoly 329 

is one of the largest in the country, the Supreme Court of 
the United States in 1920 declared it was not an illegal 
combination. The court showed that mere size was not 
sufficient to constitute a monopoly in restraint of trade, 
and declared that the existence of other competing com- 
panies proved that the United States Steel Corporation did 
not have the absolute power to fix the price of its product. 

The second form of monopoly, a monopoly through fran- 
chise, is absolute. If the franchise is perpetual, the 
monopoly is likewise perpetual. Even though Franchise 
provisions are made in franchises to limit the monopolies: 
prices which shall be charged for services, monopoly power 
still exists because the corporation may fix the price 
above a competitive level. This kind of monopoly usually 
grants the privilege of furnishing transportation, power, 
or light. 

The greatest form of franchise monopoly is the railroad. 
Enough has been said to show that railroads are essentially 
monopolies, and to show that, because of their Transpor- 
right of eminent domain and their control over taHon - 
the district through which they pass, they are enabled in 
the absence of governmental restraint to fix monopoly 
prices, — exacting " all that the traffic will bear." There 
was formerly no better illustration in the country of the 
fixing of monopoly price than that furnished by the rail- 
road industry. It is for this very reason that the federal 
government now supervises the making of railroad rates. 
Heretofore, the predominant factor affecting the price of 
railroad transportation, in the absence of some form of 
competition, has always been the price that people were 
willing to pay. 

Suburban electric trolley lines are assuming a position of 



33o American Economic Life 

greater importance in the group of franchise monopolies. 
Therefore, as interurban transportation develops, the 
franchises secured by the present interurban companies 
will give them almost as great monopoly power as that 
formerly possessed by the railroads. It is in cities, how- 
ever, that the franchise monopoly of transportation assumes 
very great importance. Trolley lines, subways, and 'bus 
companies often possess great monopoly power. For ex- 
ample, in a city of one million and a half, the competitive 
cost of transportation perhaps does not exceed three or 
four cents per passenger, yet the actual price paid by the 
passenger is usually from five to eight cents. This differ- 
ence between the price paid and the competitive price repre- 
sents the extent of the monopoly power. 

The other leading form of municipal franchise monopoly 
— the monopoly over power and light — is chiefly seen in 
Power and the control of electricity and gas. Water 
light. power is being gradually converted into elec- 

tric power, which is transported sometimes as far as two 
hundred and fifty miles. The widespread use of coal pre- 
vents the power companies from exercising their real 
monopoly power, but in the course of the century the 
diminution of the coal supply will increase the monopoly 
of the holders of water-power franchises. Light and tele- 
phone service are also furnished through franchise monop- 
olies. Companies carry on these businesses under franchises 
of long duration by means of which, in the absence of public 
restraint, they are enabled to charge prices that are con- 
siderably higher than they would be under conditions of 
pure competition. 

Labor monopolies may be in the form of personal mo- 
nopoly or monopoly of organization. In both cases, they aim 



Price and Monopoly 331 

to fix the price of labor. Personal monopoly, which is 
the result of special ability or training, is in very distinct 
contrast to the monopoly of organization which is , , 

\ J ° Labor 

the result of cooperative effort. Personal monop- monopo- 
oly demands a high salary for the individual, 

.-. 1 Personal. 

while monopoly of organization secures stand- 
ardized wages, and proper working conditions, for the mem- 
bers of the group. 

The trade-union principle is necessarily monopolistic ; 
that is, it attempts to fix wages without regard to competi- 
tion. The object of the union is so to organize Q aniza _ 
and control the supply of labor that competi- tion mo- 
tion will be impossible. Thus, a price will be 
fixed for labor, which will represent the monopoly power of 
the organization rather than the productive capacity of the 
individual members of the union, or the competitive wage 
which would be fixed if each union member was bargaining 
individually for himself. As in the case of railroads, the 
principle which dominates union activity is to charge " all 
that the traffic will bear." For example, the building 
trade-unions, which have a great monopoly power, com- 
mand a much higher wage than some of the more skilled 
operators in the tailoring trades, where unions are weak and 
monopoly power comparatively small. In the first case, 
the supply of laborers has always been limited ; in the sec- 
ond case, hordes of immigrants have for many years over- 
loaded the market and made a competitive wage possible. 
Since labor has been organized on national and international 
lines, it has greatly enlarged its monopoly power and 
increased the possibility of controlling its price. 

Public monopolies may be either municipal, state, or na- 
tional. The public municipal monopolies deal with trans- 



332 American Economic Life 

portation, water, light, the control of sanitation and health, 
and provision for police and fire protection. The state 
Public monopolies are monopolies of license fees, in- 

monopoiies. corporation fees, charter granting, and the like. 
The national monopolies include the carrying of mails, 
the printing of documents, the building of irrigation 
dams, and other activities which the government may and 
does assume. Therefore, in these monopolies, prices neces- 
sarily vary from the competitive rate. In fact, the prices 
for some government services are considerably below the 
competitive rate. The essential factor in monopoly is, 
therefore, not the fixing of high price through monopoly 
power, but the fixing of any price through monopoly power. 
Like public monopolies, natural monopolies really con- 
stitute another cross-classification of monopolies pre- 
Naturai viously mentioned. The determining quality of 
monopolies. na tural monopolies arises (i) from the naturally 
limited supply of certain raw materials of industry, and 
(2) from the inherent nature of certain business enterprises. 
Because of the limited supply of coal, petroleum, and other 
mineral deposits essential to industry, it is possible for 
organizations to secure a practical monopoly of such re- 
sources. When this occurs, a natural monopoly arises. 
Such a monopoly is found in the control by certain interests 
of the larger part of the anthracite coal beds of Pennsylvania. 
Because of this control, the owners of these mines are en- 
abled to fix the price of coal at a point far above the com- 
petitive level. Another kind of natural monopoly is that 
which arises from the peculiar nature of the business itself. 
Of such a character are railroads, telegraph and telephone 
companies, street car lines, water and light companies, and 
similar businesses. In such enterprises it is found that the 



Price and Monopoly 333 

very nature of the business is antagonistic to competition. 
The original cost of construction is so great in these cases 
that it is usually a waste of capital to duplicate the work 
already accomplished. For this reason the first successful 
company in the field enjoys the natural monopoly of per- 
forming the service. Since it is useless in these cases to rely 
upon competition as a determinant of price, it is necessary, 
in the interest of public welfare, for the government to de- 
termine the limits of the monopoly power of such combina- 
tions. 

The number of ways in which monopoly power is ex- 
pressed in monopoly price is constantly increasing; and 
the problem of monopoly is, therefore, of con- The 
stantly greater concern to the modern state. conclusi( > n - 
In a monopoly regime, the ordinary laws of price are 
largely suspended. The usual law of demand and supply is, 
for the time being, thrown into the background ; and, in 
the presence of monopoly, a peculiar condition of affairs 
exists whereby price is determined not so much through 
competition as through some form of monopoly power. 
Under such circumstances, therefore, it becomes imperative 
for public authority to act in the interest of social welfare. 

QUESTIONS FOR RECITATION 

1. Define monopoly power. Explain its importance in America 
to-day. 

2. How may the consumer limit the exercise of monopoly power 
on the part of the producer and the distributor of goods ? Give some 
examples. 

3. During, and after, the World War how was the power of sub- 
stitution exercised? 

4. When prices are unusually or exorbitantly high, how may this 
power be utilized by the consumer for his own good ? What are its 
limitations? 



334 American Economic Life 

■ 5. Is mere size, or "bigness," essential to monopoly power in 
an organization ? Prove your position. 

6. What do industrial monopolies rest upon? Classify them; 
give an example of each. 

7. Why is the control of natural resources important to an in- 
dustrial monopoly ? 

8. Why is organization important ? 

9. What is the effect of patents and copyrights? Are they 
justifiable ? Why ? 

10. Explain the meaning of franchise monopolies. Name the 
different kinds. 

11. Discuss the effect of franchise monopolies. How should they 
be limited ? 

. 12. How would car fares be affected by the restoration of the 
principle of competition ? Why do we not return to this principle ? 

13. What is the remedy for exorbitant charges for public utili- 
ties? 

14. Explain the monopoly power exercised by labor. How 
does this affect the prices of goods ? 

15. Name some public monopolies. 

16. How do public monopolies differ from private monopolies in 
regard to price fixing ? 

17. What is meant by natural monopolies ? Give some examples. 

18. Would you say that, to-day, all prices are determined by the 
theoretical laws of value ? State your reasons. 

PROBLEMS FOR DISCUSSION 

1. How old is the problem of monopoly? 

2. Outline the different kinds of monopolies. 

3. Mention some monopolies of which you have knowledge, 
and explain what monopoly advantages they enjoy. 

4. How is monopoly price determined? 

5. Explain the difference between monopoly price and com- 
petitive price. 

6. State the law of monopoly price. 

7. What advantages are claimed for public ownership of natural 
monopolies? 



Price and Monopoly 335 

8. Should the government attempt to regulate price when a 
monopoly is shown to exist ? Explain the possible danger. 

0. Is it desirable in the government to allow a monopoly to 
charge different net prices for the same commodity? 

10. What relation should,, in the interest of public welfare, be 
established between monopoly and price ? 

11. Are all monopolies trusts? Are all trusts monopolies? 
Why? 

12. How may the problem of monopoly in America be solved? 

SUPPLEMENTARY READING 

Clay, H. Economics, Chaps. VII, VIII. 

Ely, R. T. Outlines of Economics, Chap. XII. 

Ely, R. T. Monopolies and Trusts, Chaps. I-IV. 

Hobson, J. A. Evolution and Modern Capitalism, Chap. IX. 

Marshall, A. Principles of Economics, Book V, Chap. XIV. 

Taussig, F. W. Principles of Economics, Vol. I, Chap. XV. 



CHAPTER XXXIV 

Money Problems 

I. Primitive method of exchange 
i. Barter 
2. Difficulties of barter 

II. Modern method of exchange 
i . Why money is necessary 

2. Uses of money: 

a. Measure of value 

b. Medium of exchange 

c. Standard of deferred payments 

3. Characteristics of money 

III. Kinds of money 

1. Early forms 

2. Metallic money : 

a. Gold and silver 

b. Currency Act of 1900 

c. Gresham's law 

3. Paper money : 

a. Advantages and disadvantages 

b. Kinds of paper money 

c. Fiat money 

IV. Quantity of money 

1 . Prices and values 

2. Money and prices 

3. Money and goods 

4. The outlook 

Primitive Method of Exchange. — In primitive com- 
munities exchange is accomplished without the use of 

336 



Money Problems 337 

money, by means of barter. For example, if to-day you 
were to take a trip to Alaska and attempt to buy frozen 
fish from a native, you would be compelled to 
give gold dust in exchange for the fish. If the 
fisherwoman demanded a little more than you offered for 
a particular fish, you would add to the gold dust grain by 
grain, until you finally reached a quantity satisfactory to 
both. If you desired an additional fish, you would be com- 
pelled to go through exactly the same process, — the 
amount of gold dust varying each time with the size and 
character of the fish. 

In the above illustration the process of barter was 
rather easily accomplished. If one person has gold dust 
and another person has fish, and both wish to Difficulties 
exchange, some sort of transfer can be effected. of barter - 
But suppose one man has bearskins and another has fish, 
and neither desire what the other has, the problem of ex- 
change becomes more complicated. Barter is inadequate 
because it is extremely difficult to find two persons each 
having exactly what the other desires, and each willing 
to part with his possession ; and even when these condi- 
tions have been met, it is still necessary that an agreement 
be reached as to the relative values of the goods under 
consideration. 

Modern Method of Exchange. — In modern society, 
some other method of exchange becomes imperative. 
No community in which the exchange of com- 
modities is a difficult and cumbersome process money is 
can advance to any considerable degree of 
civilization. A simple and effective instrument of exchange 
is as necessary to the progress and welfare of mankind as 
are improvements in the process of production itself. 



338 American Economic Life 

Therefore, man makes use of money as a convenient means 
of exchanging one commodity for another. Money is not 
an end in itself, but merely a means of securing what is 
wanted through the process of exchange. 

Money serves two fundamentally useful purposes, and 
fulfills an important secondary function. In the first place, 
„ i money serves as a common measure of value 

Uses of \ . , 1. r 1 

money: because it is used as a medium for the expres- 
Measureof s i on f value in terms of price. Under the 
discussion of " Value and Price " we have seen 
the impracticability of attempting to gauge the values of 
various commodities in terms of each other. We cannot 
measure the value of an automobile in terms of a motor boat, 
or vice versa. We must have some common measure of 
value to which we can refer the values of all economic 
goods. Money, in civilized communities, has come to 
be the commodity which serves the purpose of measuring 
the values of all other commodities. Thus, we say the 
automobile is valued at $2000 and the motor boat at 
$1500. 

Not only does money serve as a common denominator 
of value, but, as already stated, it is also used as a medium 
Medium of of exchange. These two functions are equally 
exchange. important and mutually interdependent. When 
the value of a commodity is universally recognized, and 
when this commodity serves as a measure of the values 
of other commodities, the article so used naturally becomes 
a medium for the exchange of all other economic goods. 
Hence, money has become the means whereby the shoe- 
maker exchanges his shoes for food ; the tailor, his clothes 
for furniture ; the steel manufacturer, his steel for a palatial 
residence. In short, by the use of money, every producer 



Money Problems 339 

exchanges his particular commodity for what he requires 
to sustain and enjoy life. 

Because money is a measure of value, it is also used as 
a standard for the future payment of present obligations. 
This function of money is described as a c , , . , 

J Standard of 

" standard of deferred payments." In order deferred 
to legalize this use of money, governments ay 
usually confer upon it the quality of legal tender. Under 
these conditions, the money so described as legal tender 
must be accepted in payment of debts. It will readily be 
seen that such a device is necessary to modern business life. 
When a man contracts a debt to-day, payable in five years, 
he must know in what manner his debt may be legally dis- 
charged at the end of that period. Money measures the 
extent of his obligation and constitutes the means by which 
it is cancelled. 

In order that a commodity may be used as money, it 
must possess certain definite characteristics. In the first 
place, money must have value as a commodity ; Charac _ 
and furthermore, this value must be generally teristicsof 
recognized and comparatively stable. Of 
course, since money has a commodity value, its value will 
not be absolutely stable, but will vary in accordance with 
the law of supply and demand determining all commodity 
values. This means that when the commodity used as 
money is plentiful, and other commodities are relatively 
scarce, the value of the money commodity will decline. 
However, in the long run, the value of money must be com- 
paratively stable. It is equally important that money 
should be durable, and divisible into small parts. Without 
durability there can be no lasting value; and without 
divisibility, it is impossible to secure coins of small value 



340 American Economic Life 

for the ordinary exchanges of everyday life. Furthermore, 
money must be portable. In modern civilizations this 
quality is especially important because exchanges are so 
frequent and are effected at such great distances. A bulky 
commodity may have great value and yet fail, in this im- 
portant respect, to meet the requirements of money. 

Kinds of Money. — In primitive communities, many 
things were used as money which lacked one or more of 
these qualities. For example, Indian " wam- 
pum " was of no great value ; and the cattle 
used as money, centuries ago in Europe, would not to-day 
be considered portable. In the same manner wheat, 
although having universal value, would not make good 
money because of its destructibility and great bulk. 
Therefore, men have come to employ some form of metal 
as money. In early societies, as in Sparta, iron was used ; 
and in other places copper was employed. 

To-day gold and silver fill the requirements of money 
much more perfectly than any of the other metals. Be- 
sides being valuable, portable, and durable, 

Metallic to „ ,...,,. r1 , 

money: they are easily divisible into small parts, each 
Gold and one of which possesses considerable value. To 
facilitate the use of gold and silver as money and 
to standardize the value of the amounts used, the govern- 
ment buys gold and silver bullion and converts it into small 
coins. These coins are stamped by the government and 
their value is guaranteed. In the United States, accord- 
ing to the Act of 1878, the dollar is equal to 23.22 grains of 
pure gold, or 371.25 grains of pure silver. In each case, in 
order to make the coin more durable, alloy is added so that 
the "standard weight" of the gold dollar is 25.8 grains, 
while that of the silver dollar is 412.50 grains. Thus me- 



Money Problems 341 

tallic money is simply gold or silver converted into a special 
form. Therefore, if money, as compared with goods, is 
plentiful, that is, if gold and silver are plentiful, its value 
decreases as would that of any other commodity. Since 
its value decreases, a particular coin is able to purchase 
less ; and, therefore, there is a general rise in prices. On 
the other hand, should the supply of gold and silver decrease 
and money become scarce, as compared with other goods, 
its value would increase in proportion, and there would be 
a resulting fall in prices. 

At the close of the nineteenth century, in order to stand- 
ardize the fluctuating market values of gold and silver, 
the United States Congress passed the Gold currency 
Standard Act of March 14, 1900. The passage Act °f ^ 00 - 
of this act marked the culmination of a nation-wide dis- 
cussion of the money question. The difficulty in the situa- 
tion arose from the steady decline in the market value of 
silver in terms of gold. Toward the close of the century 
the old ratio between the two metals of sixteen to one had 
fallen approximately to thirty- two to one. That is, at that 
time, the commodity value of silver, in terms of gold, was 
just about one-half of what it was in the early part of the 
nineteenth century. To insure the financial integrity of 
the United States, both at home and abroad, Congress 
passed the Act of 1900 which expressly states that the gold 
dollar shall be the standard of value in this country, and 
that all other kinds of money shall be maintained at a 
parity with gold. This act also provided for the mainte- 
nance of a special reserve fund of $150,000,000 in gold, or 
in gold and redeemed notes, for the redemption of " Green- 
backs " or United States Notes. This act further provided 
for the coinage of a sufficient quantity of silver dollars equal 



342 American Economic Life 

to the amount of the Treasury notes of 1890 or the so-called 
Sherman notes. Since 1904, however, the United States 
has ceased coining silver dollars. 

By establishing a single-standard monetary system, and 
by requiring that the value of any dollar must be equal 
Gresham's to the value of the gold in a gold dollar, the Act 
law - of 1900 eliminates the great danger sometimes 

coincident with bimetallism, viz., the operation of Gresham's 
law. Sir Thomas Gresham, who was Queen Elizabeth's 
minister of finance, called attention to the fact that when 
two units of different kinds of money of the same nominal 
value circulate as legal tender, the cheaper unit forces the 
dearer unit out of circulation. For example, under the 
bimetallic system, because of the fluctuating market values 
of gold and silver, the silver in the silver dollar may, at any 
given moment, be of less value than the gold in the gold 
dollar. Under these circumstances, gold dollars are melted 
into bullion and sold at the market price for use in the arts 
and crafts. This means that the silver dollar remains in 
circulation for the payment of debts, and illustrates the law 
of Sir Thomas Gresham that " bad money drives out good 
money." 

Metallic money is a great step beyond barter. It stand- 
ardizes values and removes the disadvantages connected 
with individual bargaining. On the other hand, 
money: metallic money has certain obvious disadvan- 
Advantages tages. It is bulky, clumsy to handle, and easily 
anddts- i ost> These objections render metallic money 

advantages. J J 

less desirable than an advanced form of money 
known as convertible paper money, which is used side by 
side with metallic money in civilized societies. Paper 
money is a promise to pay, and so long as this promise is 



Money Problems 343 

kept, it is as good as metallic money. In fact, it has some 
advantages over metallic money. It is more easily trans- 
ported, less bulky, and much more readily transferred from 
one individual to another. On the other hand, it is more 
easily debased. During the French Revolution, during the 
American Revolution, in the Southern states during the 
Civil War, and during the recent World War, paper money 
was issued in such quantities and became so debased that 
it required huge sums to purchase ordinary commodities. 
Nevertheless, if paper money is issued and guaranteed by 
a wisely directed government, its advantages over metallic 
money are so great as to render it far more desirable. 

In the United States there are several kinds of paper 
money, but these may be generally grouped under two 
heads: (1) the notes of the national banks Kinds of 
and those of the Federal Reserve banks, and paper money. 
(2) the notes and certificates of the Federal government. 
The national bank notes and the Federal Reserve bank 
notes are bond-secured notes, that is, they are issued with 
United States bonds as security. For purposes of classifica- 
tion, the national banks are divided into three groups, — 
" country banks," reserve city banks, and central reserve 
city banks. Each one of these is required by law to main- 
tain a definite reserve amounting to a fixed percentage of 
its deposits. The paper money of the Federal government 
is also of several kinds. It includes gold and silver cer- 
tificates, and United States notes or " Greenbacks " amount- 
ing to about $347,000,000. These notes are promises to 
pay on demand and they are protected by a reserve fund 
of the Federal government which is supposed to be sufficient 
to meet any ordinary demands. Gold and silver certificates 
are redeemable into coin at any time. 



344 American Economic Life 

Paper money may take the extreme form of fiat money. 

It is sometimes asserted that the government may take 

paper, stamp it, and issue it as money to be ac- 

Fiat money. . 01 

cepted as legal tender m payment of debt. Such 
was the position in 1876 of the Greenback party and, in 
more recent years, of the Populist party. The fallacy of this 
proposition ought to be self-evident. We have seen that 
the basis of the stability of the financial system of the 
United States depends upon the fact that all forms of money 
are interchangeable, either directly or indirectly, with gold. 
This means that all forms of money are maintained at a 
parity with gold, and such could not be the case were un- 
limited quantities of paper money issued without regard 
to the gold reserve. Cheap money would most assuredly 
drive out dear money, and prices would rise by leaps and 
bounds. The recent experience of European countries 
in the World War testifies to the truth of this assertion. 
This fact, however, must not be construed to mean that 
governments may not issue limited quantities of paper 
money, even when such money is not immediately re- 
deemable in coin. 

Quantity of Money. — It will be observed that metallic 
money is spoken of as a commodity, exactly like pears or 
Prices and apples. This is true, because money is merely 
values. some form of metal which is as much an economic 

good as oil or coal. In the United States, it represents 
gold. Now since gold is a commodity, it is subject to the 
same law of value as any other commodity. That is, if its 
supply increases in a greater proportion than the demand, 
its value will decrease correspondingly. Under these cir- 
cumstances, therefore, instead of pears being worth, let us 
say, two cents, they may now be worth three cents ; and 



Money Problems 345 

the prices of all other goods will rise similarly, because 
the value of gold (or money) has fallen. Conversely, if 
the supply of gold diminishes as compared with other 
goods, the prices of commodities will fall because the value 
of gold has risen. Consequently, a general rise or a general 
fall of prices is possible. On the other hand, there can be 
no general rise or general fall of values, because value repre- 
sents the purchasing power of a commodity ; that is, a rela- 
tion between two commodities. If, therefore, the value of 
one of these goods rises, the value of the other must fall. 
If a pear formerly exchanged for two apples, and now ex- 
changes for three, the value of the one has increased at the 
expense of the other. Therefore, there can be no general 
rise or fall in all values. 

The effect of the volume of money on prices is well illus- 
trated by the economic consequences of the World War. 
This war resulted in a tremendous increase in Money and 
the amount of money — both metallic and P rices - 
paper — in circulation in this country. From July 1, 1914, 
to December 31, 1918, the value of gold imports into the 
United States amounted to $1,767,900,000, while the value 
of the gold exports from this country amounted to $738,- 
900,000, leaving a net import of $1,029,000,000 in gold. 
This sum did not take into account the gold and silver al- 
ready in circulation in the country, nor the large issues of 
Federal Reserve notes that took place during that period. 
Furthermore, in 1920, it was estimated that the metallic 
money alone in this country amounted to a total of $3,200,- 
000,000, of which $2,662,284,553 was gold. While the 
country's money was thus increasing at this rapid rate, 
vast quantities of goods were being exported abroad. 
Hence, money, because of its plentifulness, was decreasing 



346 American Economic Life 

in value; while goods, because of their scarcity, were in- 
creasing in value. Because of this combination of circum- 
stances, prices rose to an almost unprecedented level. 

Fundamentally prices depend upon this simple relation 
between money and goods. Of course the factor of credit, 
Money and which will be discussed in the next chapter, 
goods. must also be taken into consideration, as well 

as the rapidity with which money circulates in the com- 
munity. In addition, there are many minor and contribut- 
ing causes of price fluctuations, such as extravagance, 
monopoly power, tariffs, trusts, trade unions, and similar 
factors in our economic life. But the fundamental basis 
of all changes in price level, whether upward or downward, 
lies in the relation between the quantity of money, on the 
one hand, and the quantity of goods on the other. When 
money is plentiful and goods are scarce, prices will rise; 
when money is scarce and goods are plentiful, prices will 
fall. In the United States the rise in prices following the 
World War was due more, perhaps, to the increase in money 
and credit than to the decrease in goods available for home 
consumption. 

To enjoy normal prices it is necessary to establish an 
equilibrium between money and goods. Either money must 
The decrease in quantity and, thereby, increase in 

outlook. value ; or goods must increase in quantity and, 
consequently, fall in value. This may be brought about 
through increased production, or through the medium of 
international trade, which will be discussed in a succeeding 
chapter, or through a device formulated by Professor Irving 
Fisher of Yale University. Professor Fisher has advocated 
the prevention of great price fluctuations through the process 
of " stabilizing the dollar." According to his plan, the 



Money Problems 347 

weight of the dollar would be virtually increased or de- 
creased, from time to time, to offset the fall or rise in the 
value of gold. If this plan is found practicable, it may 
prove to furnish the solution of this constantly recurring 
problem. 

QUESTIONS FOR RECITATION 

1. Define barter; give examples. 

2. What difficulties of a system of barter are overcome by the 
use of money ? 

3. Why is money necessary to civilized communities? 

4. Name the two chief functions of money ; explain each. 

5. Explain the secondary function of money. Is this very im- 
portant ? 

6. Name the qualities desirable in money. Show the importance 
of each. 

7. Mention different things that have been used as money. 
Show the strength and weakness of each. 

8. Why do gold and silver make the best money? Does the 
United States have a bimetallic monetary system ? 

9. What was the purpose of the Currency Act of 1900? Why 
was it passed? State its chief provisions. 

10. Explain the meaning of Gresham's law. 

n. What is paper money? Name the different kinds of paper 
money in the United States. 

12. Explain the meaning of fiat money. Why is it ever advo- 
cated ? Do you believe in it ? 

13. Can all prices rise ? Why? Can all values rise ? Why not? 

14. How did the amount of money in the United States increase 
during the World War? What effect did this increase have upon 
prices ? 

15. Why should an increase in the quantity of money lower its 
value ? Why should a decrease raise its value ? 

16. What factor, besides money, determines prices? How did the 
World War affect this other factor ? What was the consequence ? 

17. Explain the different means by which reduction of prices is 
accomplished. 



348 American Economic Life 

PROBLEMS FOR DISCUSSION 

1. Would the exchange system be as complex as it is to-day if 
we depended mainly upon barter ? Why not ? 

2. What would be the effect of barter upon the productive system ? 

3. Why does the man on the street exaggerate the importance of 
money ? Show its true significance in modern life. 

4. Would the following make good money: iron, wheat, dia- 
monds, glass beads, seashells, beaver skins? If not, why not? 

5. Are there any respects in which gold is superior as money to 
the above mentioned commodities? If so, explain the superiority 
in each case. 

6. Contrast the relative merits of gold and silver as money. 

7. Why are copper and nickel used for coins ? What are money 
"tokens"? 

8. What is coinage? What is the difference between "free 
coinage" and "gratuitous coinage"? 

9. How does the government get the bullion which it stamps 
into coins ? 

10. Discuss the advantages of paper money. Its dangers. 

11. Explain the evils of irredeemable paper money. 

12. Discuss the quantity theory of the value of money. 

13. Explain clearly the difference between a system of bimetallism 
and a single standard monetary system. 

14. How would Gresham's law operate under bimetallism ? 

15. Had the United States adopted the "free silver" idea in 1896, 
how would prices have been affected ? 

16. How did the World War affect prices in the United States? 
Why? 

SUPPLEMENTARY READING 

Bullock, C. J. Essays in the Monetary History of the United States. 
Ely, R. T. Outlines of Economics, Chap. XIV. 
Fisher, I. The Purchasing Power of Money: Stabilizing the Dollar. 
Johnson, J. F. Money and Currency. 
Laughlin, J. L. The Principles of Money. 
Taussig, F. W. Principles of Economics, Book III. 
World's Work, July, 1920. " The Shrinking Gold Reserve," by Theo- 
dore H. Price. 



CHAPTER XXXV 

Credit and Banking 

I. Nature of credit 
i. What it signifies 

2. Individual transactions : 

a. Book credit 

b. Promissory notes 

3. Banking operations : 

a. Acceptance of checks 

b. Bills of exchange 

c. Issue of notes 

d. Deposits and loans 

e. Discount of notes 

4. Advantages of credit 

5. Preservation of credit 

II. Banking system of United States 

1. State banks 

2. The National Bank Act : 

a. Its advantages 

b. Its defects 

3. The Federal Reserve Act : 

a. Its purpose 

b. Its provisions 

(1) Federal Reserve Board 

(2) Federal Reserve Banks 

(3) Reserves and rediscounts 

(4) Issue of notes 

(5) Element of elasticity 

4. The conclusion 

Nature of Credit. — Civilized communities make use of 
another instrument of exchange known as credit. Paper 

349 



35o American Economic Life 

money is, indeed, a form of credit ; but to-day there are 
many other kinds of credit in use. In fact, so general 
what it has the use of credit become that many commer- 
signifies. c j a j transactions are carried on without the use 
of money at all. Credit, wherever it is employed, signifies 
confidence in business relations. It may be utilized not 
only by banks and corporations, but also by individuals. 
The " charge and send " of the modern department store is 
one of the most widely known forms of individual credit. 
In a primitive community, because of the uncertainty of 
the future, one cannot buy goods without paying for them 
directly. In a modern stable community, however, it is 
perfectly possible to buy goods " on credit." Where a 
man's position is known, his ability to fulfill his financial 
obligations is so well understood that his promise to meet 
them at the proper time is accepted as the temporary 
equivalent of actual payment. 

Credit may thus be employed in individual transactions. 
In fact, to-day book credit is in general use throughout the 
T ,. ., , United States, being characteristic of the small 

Individual m . 

transac- business operations of the corner grocery store 
tlons: as well as of the great commercial transactions 

Book credit. 

of the modern department store. In the pur- 
chase of groceries, for example, you may buy goods for a 
whole month without paying a single cent ; and, at the end 
of that time, the grocer sends you a bill. During the month, 
therefore, you have been receiving goods on book credit 
because the grocer had confidence in your ability to pay him. 
Likewise, in a great department store, hundreds of dollars' 
worth of goods are transferred from one person to another 
without the direct payment of money. 

In the same manner an individual, in immediate payment 



Credit and Banking 351 

of an obligation, may make out his note or promise to pay at 
the end of a specified time. For example, if a merchant 
is short of present funds but desires to make Promissory 
an immediate purchase of goods, he gives his note notes - 
for sixty days in payment of the debt. He has not the 
money now, but expects to have it in the near future. The 
manufacturer of whom he buys the goods has such confi- 
dence in the merchant's ability to pay at the end of the time 
specified in the note that his promise is taken instead of 
money. 

In credit transactions, however, banking institutions play 
by far the most important part. In modern society the 
bank is a credit factory, and its operations in Banking 
turn depend upon the existence of confidence operations: 
in business relations. Perhaps two- thirds of all Checks - 
business transactions are accomplished by means of bank 
credit. Take, for example, the enormous volume of busi- 
ness negotiated through the acceptance and cashing of 
checks by the banks. A check is an order on a bank to pay 
to a person money which he himself, or another, has on de- 
posit in that bank. A lawyer, for example, wishing to pay his 
doctor's bill, does not give him actual money, but sends him 
a check for the required amount. The physician then takes 
this check to his own bank (which may or may not be the 
same as that of the lawyer) and either has it cashed or de- 
posits it to his own credit. The lawyer does exactly the 
same thing when he receives a check from the physician 
in payment of professional services he has rendered. In 
case the lawyer and the doctor (and hundreds of others in 
like positions) have accounts at different institutions, the 
banks meet together in a " clearing house " and there settle 
whatever differences may exist between them by reason of 



352 American Economic Life 

the varying amounts of their claims on each other. Through 
confidence in individuals and in banking institutions, the 
use of checks in business transactions has become a settled 
method of discharging financial obligations. 

The bank also plays an important part in business trans- 
actions accomplished by means of bills of exchange, which 
Bills of greatly economize the use of money. Such a 
exchange. ^m j s a d ev i ce whereby two individuals at a 
great distance from each other effect a payment of a debt 
without the transfer of money from one to the other. Sup- 
pose, for example, a New York importer buys goods to the 
value of $50,000 (or £10,000) from a London exporter; 
and, at the same time, a New York exporter sells goods of 
the same value to a London importer. Instead of causing 
$50,000 to be transported twice across the Atlantic, the 
bank of the New York exporter, to whom the money is 
due, buys from this exporter a bill of exchange for $50,000. 
The New York importer through his bank buys this bill 
of exchange (which constitutes a claim on the London 
importer for £10,000), indorses it, and sends it to the 
London exporter who, in turn, presents it to the importer's 
bank in his own city and receives the £10,000 (or $50,000) 
due him and already paid to the bank by the London im- 
porter. In this manner, by means of banking institutions 
and a bill of exchange, all four men have been satisfied 
without the necessity of transferring large sums of money 
across the water. 

The issue and circulation of bank notes show clearly the 
confidence of the public in banking operations. A bank 
issue of note is simply a promise to pay based on the 
notes. resources and credit of a banking institution. 

If the bank's resources are good, its notes circulate at par. 



Credit and Banking 353 

Its standing in the community rests upon the confidence 
which men place in its financial integrity and in its obedience 
to the law. In the United States, national bank notes are 
issued with government bonds as a basis*; hence, their 
value is practically assured and no one hesitates to accept 
them. 

The existence of confidence in banking institutions is 
also seen in their function of deposit. People deposit 
money in the bank for the purpose of saving it, Deposits 
or for the purpose of drawing checks against it. and loans - 
In either case they have confidence in the bank. If they 
deposit for the purpose of saving, the bank uses the money 
commercially. It makes loans to industrial enterprises, 
receives interest in return, and then pays to the depositor 
a part of the interest thus received for the money used in 
industry. Banks accept check accounts because, by this 
means, they secure the use of surplus money. On the 
other hand, the depositor opens a check account in order 
to pay his bills through bank credit without the interven- 
tion of money transactions. The deposits are safeguarded 
by a thorough system of bank inspection, and by legal re- 
quirements concerning the amount of specie reserve. 

Another leading function of banks is the discounting of 
notes, bills of exchange, and other forms of commercial 
paper. A merchant may have a note payable Discount 
in sixty days and wish to realize credit on this °f notes - 
note without delay. By taking it to the bank, he secures, 
in return for it, money or credit good immediately. Natu- 
rally, for this accommodation he pays a discount, which is 
one of the chief sources of revenue to banking institutions. 
In a similar manner, banking houses discount bills of ex- 
change. 



354 American Economic Life 

From this description of credit and credit instruments, it 
is apparent that credit is one of the most important factors 
Advantages m facilitating modern commercial transactions, 
of credit. The advantages of credit instruments may be 
summarized as follows : (i) they economize the use of pre- 
cious metals; (2) they save labor in the transfer of 
goods ; (3) through deposits in banks, small savings may 
be amassed in large sums and converted into capital; 
(4) through banking institutions, large sums of money may 
be secured for commercial purposes in return for promises, 
made under certain specifications, to pay back the loans. 

On the other hand, credit, when improperly employed, 
may lead to extravagance in consumption and to specula- 
its preser- tive enterprises in production. Its great peril 
vation. j s inflation. Nevertheless, credit is one of the 

most effective tools in the hands of modern society. Its 
value is fundamental ; its abuses incidental. Credit repre- 
sents one of the great steps in the advance of commercial 
development. The urgent demand at the present time is 
for its preservation and safeguarding. Since credit is so 
essential to modern welfare and prosperity, every possible 
device should be employed to insure its integrity. Strin- 
gent legal regulations should be made and enforced in order 
to prevent that too extensive use of credit which leads to 
inflation and speculation. 

The Banking System of the United States. — Aside 
from trust companies and savings banks, the functions of 
state which may be inferred from their titles, bank- 

banks. m g institutions in the United States are grouped 

chiefly under two heads, (1) state banks and (2) national 
banks. The first of these operate under state laws and 
therein lies their weakness. In early days lack of uniform- 



Credit and Banking 355 

ity in state requirements made it possible for banks in one 
state to operate under lax conditions not tolerated in an- 
other state. Hence a great difference arose in methods of 
administration. In some cases reckless and dishonest 
management resulted in altogether inadequate reserves, 
and in the issue of almost irredeemable notes. As a result 
frequent panics occurred, like those of 1837 an d 1857, m 
which few state banks were able to maintain specie pay- 
ment. 

In 1863 Congress determined to remedy this situation 
and, at the same time, to meet the exigencies of Civil War 
by passing the National Bank Act of that year. 
This provided for a new system of national National 
banks, and laid down the rules for their organi- Bank Act: 
zation, management, and inspection. By laying ^l mntageSm 
a prohibitory tax upon the issue of state bank 
notes, these notes were driven from circulation and replaced 
by national bank notes which, as we have seen, were se- 
cured by United States bonds and made redeemable on de- 
mand. By requiring each bank to keep on hand a cash 
reserve of a certain percentage of its deposits, the interests 
of the creditors were also protected. 

While this act marked a great improvement in the bank- 
ing system of the United States, its operation proved that 
there was not sufficient elasticity in our currency 
system. Safety was provided at the expense of 
elasticity. The volume of currency in a country should 
contract or expand according to the decrease or increase in 
the volume of legitimate commercial transactions. But 
the very uniformity of the requirements of the Act of 1863 
prevented this contraction and expansion. Furthermore, 
this act did not provide sufficient centralization of govern- 



356 American Economic Life 

mental authority over the entire banking system. Some 
central coordinating authority was necessary in order that 
the national banks might cooperate with one another in 
times of financial stress. 

Accordingly, in December, 19 13, Congress passed the 
Federal Reserve Act. This act attempts (1) to provide 

the machinery whereby a national bank can, at 
Reserve any given moment, provide the community which 

it serves with an amount of currency sufficient 

Its purpose. . . . i / \ 

to meet its present legitimate needs ; and (2) to 
provide a system of federal supervision whereby, through 
proper cooperation of the banks concerned, every bank in 
the system will be enabled to meet all its financial obliga- 
tions, and to keep its promises to redeem its paper dollars 
in gold when presented for payment. 

To accomplish these purposes, the Act creates a Federal 
Reserve Board of seven members made up of the Secretary 
its pro- of the Treasury, the Comptroller of the Currency, 
visions. anc [ £ ve ther members appointed by the Presi- 

dent. Of these last five, two must be expert bankers, but 
are not permitted to have banking affiliations, or to own 
bank stock during their term of service. This board 
exercises final control over the operation of the entire 
system. It can force one regional bank to loan funds to 
another in times of financial stress ; it can, in extraordinary 
circumstances, suspend the restrictions regarding the re- 
sources which regional banks are ordinarily required to 
hold ; and it can, when necessary, remove directors of re- 
gional reserve banks. 

For purposes of administration and to secure a more 
effective handling of reserve funds, the country is divided 
into twelve districts, in each of which is established a Fed- 



Credit and Banking 357 

eral Reserve Bank. These banks are purposely scattered 
throughout the country and are located in the following 
Federal Reserve cities : Boston, New York, Philadelphia, 
Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minne- 
apolis, Kansas City, Dallas, and San Francisco. The capital 
of a Federal Reserve Bank is furnished by the member- 
banks in each district, each one of which contributes a 
sum equal to six per cent of its capital and surplus combined. 
These member-banks are composed of national banks, 
which are compelled to join, and such state banks which 
elect to join the Federal Reserve System, by bringing their 
reserve requirements up to the standard set for national 
banks and by submitting to national examinations. Each 
member-bank keeps part of its funds on deposit in the 
Federal Reserve Bank of its district. The Federal Reserve 
Banks have been called " bankers' banks," because, aside 
from dealing in bills of exchange in the open market, they 
do not make loans to individuals directly and do not accept 
individual deposits. 

The funds of reserves from member-banks, together with 
government moneys, make up the deposits of the Federal 
Reserve Banks. Each of these regional banks is required 
to keep a reserve of thirty-five per cent of its deposits, be- 
sides a forty per cent gold reserve behind the issue of Federal 
Reserve notes. The regional or Federal Banks may re- 
discount — that is, buy at a discount — the notes and other 
obligations to pay money held by the member-banks against 
individuals who have borrowed money, properly secured, 
from these local banks. That is, in return for the indorsed 
notes of the member-bank, the Federal Reserve Bank sends 
it cash or money. 

Upon the security of the rediscounted paper, or in ex- 



358 American Economic Life 

change for gold, the Federal Reserve Banks may issue 
Federal Reserve notes. That is, in the exchange described 
above, the member-banks may receive the required cash 
in the form of Federal Reserve notes. It is this provision 
of the Federal Reserve Act which insures elasticity to our 
currency system. The regional banks may also issue Fed- 
eral Reserve bank notes, which are secured by government 
bonds deposited with the Treasury Department, in the 
same manner as national bank notes. The Act intends, 
however, that the national bank notes will be ultimately 
retired. 

The element of elasticity in our currency system is pro- 
vided chiefly through the Federal Reserve notes issued on 
the security of rediscounted paper. We have already re- 
marked that the volume of currency should expand or con- 
tract with the volume of commercial transactions. Now, 
when business is brisk, the local banks will be lending large 
sums of money based on the personal notes of business 
men. These notes will then be rediscounted, that is, ex- 
changed for Federal Reserve notes, which will then come 
into circulation as money. The more active business be- 
comes, the greater will be the volume of currency. When 
business is slack, however, the local banks will cease so 
much lending, rediscounting will stop, and the volume of 
currency will not be further enlarged. Thus, theoretically, 
the supply of money becomes automatically adjusted to the 
demand for it. 

The Federal Reserve system has thus materially im- 
proved the banking system of the United States. If there 
The is any weakness to be feared in this system, it lies 

conclusion. m j-^g ease w ith which bank credit may be ex- 
panded and the difficulty with which it may be contracted. 



Credit and Banking 359 

In other words, the danger of this system lies in inflation 
and high prices. During the World War, the volume of 
currency was expanded in accordance with national needs ; 
but, in the period immediately following the war, the coun- 
try suffered from too much credit inflation. In fact, in 
1920, there were $3,000,000,000 of Federal Reserve notes 
in circulation. For the entire success of this system, it 
is necessary to bring about a more speedy contraction of 
bank credit when the necessity for expansion has ceased. 
The Reserve Act, however, provides the basis for this con- 
traction in two ways. In the first place, no Federal Re- 
serve Bank may reissue the notes of another such bank, 
but must return them " for credit or redemption " to the 
bank issuing them. In this respect, therefore, contraction 
will depend upon the rapidity with which such notes find 
their way back to a Federal Reserve Bank. In the 
second place, bank credit may be checked by increasing 
the rates charged by the Federal Reserve Banks for redis- 
counting the notes of the member-banks. By making it 
less profitable for the local banks to lend money to individual 
business men, speculative enterprises may be discouraged. 
In November, 1919^ year after the close of the World War, 
the Federal Reserve Board began to exercise its powers in 
this direction by increasing the rediscount rates, and by 
enforcing the regulations concerning the normal reserves. 

QUESTIONS FOR RECITATION 

1. Define credit ; give an example. 

2. Explain the meaning of book credit. 

3. What is a promissory note? What is a check? What con- 
nection has the bank with either or both of these ? 

4. Explain just exactly what a bank is. 



360 American Economic Life 

5. Explain clearly the function of a bill of exchange. Show 
how the bank enters into this transaction. Why does it do this ? 

6. Explain how banks are able to issue notes. 

7. Why do banks accept deposits and make loans? How is 
this advantageous to all concerned ? 

8. Why do banks discount notes ? 

9. Summarize the advantages of bank credit. 

10. May any evils result from the use of credit? How may 
they be remedied ? 

11. Why did state banks prove dangerous in the early history 
of our country ? 

12. What are national banks? Show their advantages over state 
banks. 

13. Why was the Federal Reserve Act of 1913 passed? State 
its main purposes. 

14. Are all national banks part of the Federal Reserve System? 
Are all state banks ? 

15. How many Federal Reserve Banks are there? Where are 
they located? Why are they called "bankers' banks"? 

16. Outline the provisions of the Federal Reserve Act. 

17. Explain a weakness in the Federal Reserve system. How 
may it be remedied ? 

PROBLEMS FOR DISCUSSION 

1. Discuss the effect of credit upon the productiveness and 
accumulation of capital. 

2. Explain the difference between individual credit transactions 
and banking operations. 

3. Discuss the importance of the bank to the community; de- 
scribe its chief functions. 

4. Contrast trust companies, savings banks, state banks, and 
national banks. 

5. What is the difference between a national bank note and a 
government bond ? Should the latter circulate as money ? 

6. How are bank deposits protected? How are bank notes 
protected ? 

7. Explain what is meant by "wildcat" banks. 



Credit and Banking 361 

8. How has the United States prevented the issue of state bank 
notes ? Why ? 

9. Why do national bank notes circulate at par? How is their 
value guaranteed ? 

10. What was the chief defect of the National Bank Act of 1863? 
When and how was this remedied ? 

11. Discuss the functions of the Federal Reserve Board. 

12. Explain the difference between the Federal Reserve Bank 
and the member-banks. Explain the relations existing between 
them. 

13. Explain how notes are rediscounted by Federal Reserve 
Banks. 

14. What are Federal Reserve notes? Under what conditions 
are they issued ? How is their value guaranteed ? 

15. What are Federal Reserve bank notes? What guarantees 
their value ? 

16. What is the effect of the issue of Federal Reserve notes? 
What may be the final result ? 

17. How may bank credit be contracted, when once inflated? 



SUPPLEMENTARY READING 

Bagehot, W. Lombard Street, Chap. II. 

Carver, T. N. Principles of Political Economy, Chap. XXV. 

Clay, H. Economics, Chap. X. 

Cleveland, F. A. Funds and Their Uses. 

Dunbar, C. F. Theory and History of Banking, pp. 1-94, 158-190. 

Scott, W. A. Money and Banking, Chaps. I-VI, XIV, XV. 

White, H. Money and Banking, Book II, Book III, Chaps. I-XIV. 

Willis, H. P. The Federal Reserve System. 



CHAPTER XXXVI 

Modern Finance 

I. Evolution of finance 

i. Importance of funds 
2. How secured: 

a. At first 

b. At the present time : 

(i) Through corporations 
(2) Through " trust finance" 

II. How companies are formed 

1 . A slate company : 

a. The " promoter " : 
' (1) His first steps 

(2) His later activities 

b. The company organized : 

(1) How accomplished 

(2) How stocks are "floated" 

2. United States Steel Corporation : 

a. How formed 

b. Its capitalization 

III. Results of modern finance 

1. Chief advantages 

2. A great danger 

3. Other evils 

4. Conclusion 

Evolution of Finance. — The latest development of 
credit as applied to industry appears in the financing of 
great business concerns. Credit is intimately connected 
with modern finance because, by means of it, the business 

362 



Modern Finance 363 

world is able to secure large sums of money with which to 
finance its propositions. To carry on any business what- 
soever funds in some form are essential, because importance 
they are needed to procure the necessary land, offunds - 
labor, and capital. Without funds, natural resources lie 
idle, labor is unemployed, and capital waits for invest- 
ment. The procuring of these funds constitutes one of the 
chief duties of the business organizer. 

To understand the origin of modern finance, it is neces- 
sary briefly to recapitulate the manner in which vast 
funds have been accumulated in this country. Howse . 
In the early part of the nineteenth century, cured: 
business was conducted largely on an individual, Ai $ rst - 
or partnership, basis. One man, with a small amount of 
capital, went into business for himself. Or, if he did not 
have sufficient funds, he went into partnership with two 
or three of his friends who entered into a mutual agreement 
and helped in the business management. 

This simple method of securing funds, proving inadequate 
for the demands of modern business, was succeeded by the 
corporation, which possesses so many advan- 
tages over the partnership method of procuring 
capital that it has completely revolutionized the system 
of business finance. From the standpoint of funds, the 
greatest advantage of the corporation method of doing 
business lies in the power of the board of directors to issue 
securities for providing the funds necessary to productive 
enterprises. These securities may be in the form of stocks 
or bonds. Stocks are certificates of investment upon 
which annual dividends are declared. Bonds are certifi- 
cates of indebtedness which bear a definite rate of in- 
terest. The former represent invested wealth ; the latter, 



364 American Economic Life 

debts or obligations which must be ultimately discharged. 
Because immense funds for business undertakings are 
secured through these two means, the corporation idea 
marks a great advance in the development of modern 
finance. 

The next step in the evolution of finance was brought 
about by the development of large scale production and the 
invention of that form of business organization known as 
the trust. Although the board of trustees (from which 
body we get the name " trust ") has been declared illegal, 
its essential feature — the centralization of capital and 
business control — still exists in the form of the holding 
company. Instead of appointing a board of trustees which 
holds stock of other companies, the organizers of the trust 
form a new corporation. Here is the opportunity of amass- 
ing colossal sums of capital, and of having these enormous 
funds managed by central control. To bring about these 
results, questionable methods have often been employed 
and have given rise to the phrase " high finance." But 
" high finance " should not be confused with that legiti- 
mate " trust finance " which secures funds through per- 
fected and advantageous business organization. 

How Companies Are Formed. — To realize more clearly 
the nature of this kind of finance, let us examine the usual 
A slate method of organizing an industrial company, 

company: Comparatively few people really understand 
the procedure involved in converting a business propo- 
sition into marketable securities through the medium of 
modern finance. Suppose in a region fifty miles square 
there is located a group of slate quarries capable of pro- 
ducing the only slate in the neighborhood. Here is a 
natural resource, furnishing an excellent basis for a com- 



Modem Finance 365 

bination of interests, and requiring only that sufficient 
funds be secured for its development. 

Looking over this field, the " promoter " — the man 
who organizes and directs combinations of capital — plans 
a definite proposition. After careful con- The « pro . 
sideration of all aspects of the question, he moter " 
concludes that it is possible to form a combination to 
control slate production in this region. He first goes to 
the bankers who in the past have assisted him in financing 
his enterprises, explains the situation to them, and asks 
for their cooperation. If they have confidence in the pro- 
moter, and if the undertaking appears profitable, they agree, 
in the event of the proposition proving desirable, to render 
him any necessary financial assistance. 

Having thus secured this backing, the promoter, or his 
representative, proceeds into the slate region, and goes from 
quarry to quarry buying up options. That is, he secures 
for, perhaps, one thousand dollars the right to purchase 
for a stated sum a slate quarry at any time before the end 
of two years. If the promotion is successful, the promoter 
returns after a few months to his banking house and 
states that he has secured options on all the properties. 
He also makes a report concerning their capacity, the quality 
of their product, the possibility of their development, and 
the prospect of effecting economies. 

If, at this stage, the proposition looks unfavorable, it is 
dropped. If, however, it seems feasible to organize a 
successful company, a charter is applied for 
and the company incorporated; stocks and company 
bonds are issued by it ; and the options on the orgamze ■ 
various slate properties are taken up. Perhaps these 
stocks and bonds are given to the owners of the slate 



366 American Economic Life 

quarries in return for their properties. It may be, how- 
ever, that the owners insist on cash payment. In this 
case, the stocks and bonds are taken by the banking house 
and " floated." This is done by the agents of the banking 
house traveling over the country, visiting financial in- 
stitutions, trust companies, or individuals likely to buy 
such securities and offering for sale those of the newly 
organized company. 

These securities may be listed on one or more stock ex- 
changes. In that case, they are sold to the general public, 
if people choose to buy them in the usual way. By what- 
ever method the promoter and his bank proceed, however, 
the ultimate aim of the company is to sell the securities to 
the public, organize the business on an efficient basis, and 
make it pay dividends on the securities issued. If the 
promoter has used good judgment, and if the company is 
not overcapitalized, the new corporation has a good chance 
of success. Confidence on the part of investors, as well as 
honesty on the part of the company, is absolutely essential 
to the process of successful promotion. 

This description of the organization of a hypothetical 
company to control the slate business in a given locality 
United ^ as b een paralleled a hundred times in the course 

states of the last forty years. The organization 

Corporation: of the United States Steel Corporation was, in 
How a large way, an almost exact duplicate of the 

slate quarry example, except that the proposition 
to consolidate the steel interests was most welcome to the 
steel manufacturers themselves. Competition had been 
very severe. Numerous small trusts had been formed. 
The Morgan interests, well acquainted with this situation, 
undertook to organize a combination of all of the in- 



Modern Finance 367 

dependent producers. Gradually the principal companies 
were consolidated, with the exception of the Carnegie Steel 
Company, which at first refused to combine. In reply 
to the trust's threats, the late Mr. Carnegie proposed to 
erect a steel plant on Lake Erie which would produce steel 
rails more cheaply than any plant the trust then owned. 
Eventually, however, the Carnegie plant was bought out 
at Carnegie's own price, approximately $400,000,000. 

At its inception, the steel trust was overcapitalized, 
because of the enormous prices which some of the con- 
solidating firms received for their plants, and Its ca pitai- 
because of the great bonuses secured by the ization - 
promoters. However, the reconstruction of the plant and 
the purchase of the Tennessee Coal and Iron Company 
in 1907 established the trust on a strong basis. This, 
together with the reorganization of steel manufacturing, 
which the steel trust has effected, renders it very probable 
that at the present time the total capitalization of the trust 
(about two billion dollars) represents something like actual 
value. 

Results of Modern Finance. — The advantages of mod- 
ern finance are twofold. In the first place, the corpo- 
ration, as financed by the modern banker, gives chief 
the aggressive business man an opportunity to advantages, 
secure large funds of capital. At the same time, the small 
investor is enabled to invest sums of capital in a large 
progressive business and thus becomes a participant in a 
successful enterprise. Neither of these transactions would 
be possible without the institution of credit. Stocks and 
bonds, which together form one of the most important 
kinds of credit instruments in modern industry, furnish a 
common basis for the small investor and the large indus- 



368 American Economic Life 

trial enterpriser. Of course, the savings bank may occa- 
sionally intervene between these two ; but, neverthe- 
less, they finally come together through the medium of 
securities. 

Financial methods, as employed by the holding company 
of to-day, have wrought wonderful changes in our financial 
A great an d industrial system. Fifty years ago, the 
danger. Steel Trust would have been considered an im- 
possibility, because it was generally believed that no single 
business concern could finance and manage so large an 
enterprise. Gradually, however, men learned how to 
integrate individual industries. This was considered, and 
rightly so, a wonderful achievement. It was followed, 
however, by the development of financial centralization, 
which permitted one management to control several 
integrated industries. By means of this financial control, 
it was quite possible, at one time, for effective power over 
our greatest industrial corporations to be centered in the 
hands of a half dozen powerful financiers. To check this 
centralizing tendency in our financial life, Congress in 
1 91 4 passed the Clayton An ti- trust Act. This act aims 
to prevent financial centralization by prohibiting " inter- 
locking directorates" ; that is, by making it illegal for an 
individual to serve as a director of two or more industrial 
corporations doing an interstate business, if one of these 
has a capital of over $1,000,000, and if such corporations 
are natural competitors. 

Other evils are incident to the system of modern finance. 
Chief among these are overcapitalization, " stock watering," 
other and public deception regarding the value of 

evils. securities. Overcapitalization naturally follows 

from the process of " stock watering." This results from 



Modern Finance 369 

the fact that the par value of the stock does not represent 
its real value. The difference between these two values is 
the " water " in the stock. It can readily be seen what 
injury is done to good business management, and therefore 
to the community, when attempts are made to pay divi- 
dends on an amount of wealth larger than that which is 
actually engaged in productive enterprise. Paper values 
are not real values. The tragedy of the New York, New 
Haven and Hartford Railroad Company bears eloquent 
witness to the fatal consequences of reckless financiering. 
Every effort should, therefore, be made to preserve the 
legitimate character of modern finance. Finance is a 
development of credit and depends upon credit The 
for accomplishing its purpose. No sanction conclusion. 
should be given the methods of those financiers who, by 
their misrepresentations, serve to weaken public confidence. 
Their acts should be rigidly scrutinized and a sharp dis- 
tinction drawn between legitimate and illegitimate financier- 
ing. Social welfare is largely dependent upon the mainte- 
nance of a high standard of integrity in the development of 
modern financial methods. Therefore, stringent laws should 
be passed to check reckless financiering, to supervise the 
issuance of securities, to prevent overcapitalization of 
corporations, and to protect, in whatever manner necessary, 
the rightful interests of the investor. 

QUESTIONS FOR RECITATION 

1. Explain the importance of funds to society. 

2. Trace the evolution of finance from the days of the single em- 
ployer to the rise of the trusts. 

3. Define stocks and bonds. Explain the difference between 
them. 



370 American Economic Life 

4. How do corporations secure funds ? 

5. What are the duties of a promoter? 

6. Explain clearly how a new company is organized, and its 
securities put upon the market. 

7. Who organized the United States Steel Corporation? How 
was it done ? 

8. Why was the United States Steel Corporation able to suc- 
ceed, while the New York, New Haven and Hartford Railroad Com- 
pany failed ? 

9. Describe the great benefits of modern finance. 

10. What great danger at one time threatened the financial life of 
America ? How has it been averted ? 

11. Explain the meaning of "stock watering" and overcapitaliza- 
tion. Why are they resorted to ? 

12. How may the interests of investors be properly protected? 

PROBLEMS FOR DISCUSSION 

1. Is money the only form of funds ? Name some others. 

2. Explain how funds are raised by modern business men. 

3. Could you go to a bank to-day and raise funds for financing 
you through the university ? Why not ? 

4. When a trust is organized, how are the necessary funds raised 
for purchasing the stock of the underlying companies ? 

5. Explain the steps by which a trust is organized. 

6. What is meant by the "capitalization" of a trust? 

7. On what bases may the amount of capitalization be deter- 
mined ? 

8. Why are some doubtful companies ultimately successful, 
and why do others of like character fail? 

9. Could large scale production be carried on without modern 
methods of financiering? 

10. Does "stock watering" harm the public? The investor? 
Why? 

11. What are "blue sky" laws? Why are they passed? 

12. What good has the modern financier accomplished? What 
harm has he sometimes done ? 



Modern Finance 371 

SUPPLEMENTARY READING 

Carver, T. N. Principles of Political Economy, Chap. XXVII. 

Cleveland, F. A. Funds and Their Uses. 

Dewing, A. S. Corporate Promotions and Reorganizations. 

Federal Trade Commission. Annual and Special Reports, 

Lyon, W. H. Capitalization. 

Meade, E. S. Trust Finance; Corporation Finance. 

Smith, J. R. Story of Iron and Steel. 

Tarbell, I. M. History of the Standard Oil Company. 



CHAPTER XXXVII 
International Trade 

I. The underlying principles 
i. Why men trade 

2. How trade developed 

3. Foreign trade : 

a. Its primary basis 

b. The disturbing factors : 

(1) Nationalism 

(2) Commercial expansion 

(3) Overproduction 

c. American foreign trade : 

(1) Chief exports and imports 

(2) Balance of trade 

IJ. General features of foreign trade 

1 . Its characteristics : 

a. World markets 

b. Standard prices 

c. Method of payment : 

(1) Bills of exchange 

(2) Rate of exchange 

2. How it is restricted : 

a. Chief kinds of restrictions 

b. Protection : 

(1) Its purpose 

(2) Its advantages 

(3) Its disadvantages 

c. Free trade : 

(1) Its benefits 

(2) Its defect 

d. The conclusion 

372 



International Trade 373 

Of the various problems that arise in a discussion of 
the exchange of wealth, none is more important than the 
trade relations of civilized communities. In fact, foreign 
trade is inseparably connected with modern industrial 
life. 

The Underlying Principles. — It seems a truism to say 
that, in the present stage of the world's economic develop- 
ment, an individual cannot produce a sufficient Why men 
variety of economic goods to satisfy his manifold trade - 
wants. Yet this fact is at the basis of all trade. This is 
an age of specialization in production and of minute 
subdivision in labor. For example, one man or a group of 
men produces nothing but woolen goods ; another confines 
his attention exclusively to the production of foodstuffs ; 
while a third concentrates all his time and effort upon the 
construction of building materials. If each man, therefore, 
consumed only what he produced, many of his wants would 
remain unsatisfied. He must consequently trade with his 
fellow men and secure from them, in exchange for the 
results of his own labor, the commodities which they 
produce that are essential to his happiness. In modern 
communities, individual and social welfare is absolutely 
conditioned upon the free interchange of commodities. 

In primitive societies, this problem of exchange was 
comparatively insignificant. Every individual produced, 
in some fashion, all that was absolutely needed to How trade 
sustain life, and, his wants being few and un- devel °P ed - 
developed, he was not dependent upon the labor of his 
fellow man. To-day, however, the trade relations of so- 
ciety have developed to such an extent that nations war 
upon each other in order to secure the benefits accruing 
from wider trade relationships. Beginning with insignifi- 



374 American Economic Life 

cant local exchanges, the sphere of trade gradually widened 
until it extended to a free interchange of commodities 
produced within the same country. Thus domestic trade 
was established. But, as the facilities for transportation 
developed, a nation's trade expanded beyond the confines 
of its own borders, until domestic trade was supplemented 
by foreign trade. In this way, there was inaugurated 
international trade which now plays such an important 
part in the life of all great commercial nations. In fact, 
the existence of nations sometimes depends upon the 
preservation of their international trade. Should England, 
for example, be cut off from her trade connections with the 
rest of the world, her people would suffer severely from the 
curtailment of the food supply and many raw materials 
of industry. 

The underlying economic principle of international 
trade arises primarily from the varying conditions of 

production, and from the fact that certain parts 
trade: of the world are geographically fitted for the 

its primary production of particular commodities. For 

example, coffee grows well in Brazil; tea is cul- 
tivated in China; and cotton is cheaply grown in the 
southern part of the United States. In a similar manner, 
Canada, the United States, South Africa, and Australia 
easily produce wheat; while northwestern Europe, by 
reason of its mineral deposits, is peculiarly suited to manu- 
facturing. Thus, each of these areas has a specialty for 
which it might well seem that nature intended it. This 
local fitness for production, due to favorable physical 
conditions, is the primary basis for international trade. 
To-day, in spite of strong national prejudices, this principle 
of international exchange asserts itself. 



International Trade 375 

The chief barrier against the free interchange of commod- 
ities among nations, each one of which is especially 
fitted for the production of particular goods, 
lies in this feeling of national solidarity. So disturbing 
long as the world is organized along the lines of ^ actors ' 
nationalism, no rigid and absolute specialization in pro- 
duction is probable. That is, every nation, as a matter of 
political policy, will attempt to produce, or in some manner 
to command, the goods essential to its continued national 
independence. In addition to the influence of national 
solidarity, two other factors interfere with the full utili- 
zation of the physical basis for international trade. In the 
first place, a commercially expanding nation with large 
resources and limited markets aims to secure additional 
trade in spite of the law of local fitness. For this reason, 
although northwestern Europe is peculiarly suited to 
manufacturing, many large American trusts enter Euro- 
pean markets and, notwithstanding the extra cost of trans- 
portation, sell their goods at a profit in these markets. In 
the second place, surplus products are often " dumped " 
in a foreign market. That is, when a manufacturer finds 
that he has produced more goods than can be sold at home, 
he sells them abroad at greatly reduced prices. In all 
these cases, the principle of local fitness has been violated. 

In order to ascertain whether this principle is generally 
observed in American foreign trade, let us examine the 
character of American exports and imports. Al- , 

x American 

though the amount of manufactured goods which foreign 
the United States exports is gradually increasing, tra e ' 
agricultural products have always made up the bulk of 
our exports. Chief among these exports are cotton, meat 
and dairy products, iron and steel manufactures, bread- 



376 American Economic Life 

stuffs, copper and its products, mineral oils, live stock, 
tobacco, agricultural implements, cotton manufactures 
and leather products. On the other hand, the imports of 
the United States consist largely of sugar, coffee, chemicals, 
drugs and dyestuffs, raw silk, India rubber, wool, jewelry 
and precious stones, and some copper and iron manu- 
factures. In a general way, therefore, the United States 
exports what the country is well fitted to produce and im- 
ports what other countries are especially able to turn out. 
Although there are some striking exceptions to the rule, 
the trade relations of the United States may be said, for 
the most part, to conform to this general economic principle. 
The World War stimulated American foreign trade 
enormously, and exercised a potent influence upon what is 
known as the " balance of trade." This balance of trade 
represents the difference between a nation's volume of 
exports and imports. From 1910 to 1919 the annual 
exports of the United States to Europe increased from 
approximately one and three-fourths billion dollars to 
more than seven billion dollars, while during the same 
period our annual imports from Europe increased from 
about one and a half billion to over three billion dollars. 
Thus our favorable balance of trade jumped from $250,- 
000,000 in 1910 to $4,000,000,000 in 1919. Shortly after 
the close of the war the balance of trade in favor of the 
United States rose for a time to even higher figures. This 
meant that the excess of goods sent to Europe had to be 
paid for in either gold or credit. Huge loans were raised 
for this purpose ; but, in the end, a large part of the obliga- 
tion had to be discharged through the payment of money. 
The influx of gold into the country piled up prices still 
higher and added to the already heavy burden of the in- 



International Trade 377 

creased cost of living. We have already seen that, when 
money is plentiful and goods are relatively scarce, prices 
are high. To effect an equilibrium, exports and imports 
must more nearly balance one another so that the gold 
supply may shrink and goods become more plentiful. 

General Features of Foreign Trade. — To-day inter- 
national trade has taken on some well-defined char- 
acteristics. In the first place, certain localities 
have developed into world markets, that is, def- teristics: 
inite places have become centers of trade for World 
particular commodities. For example, Chicago 
and Liverpool are world markets for wheat. Each of 
these markets feels the effect of adverse conditions in the 
other. If, therefore, there should be a wheat famine in 
Europe and an abundant crop in the United States, the 
export trade of the United States in this commodity would 
increase enormously. On the other hand, if conditions 
were reversed, American exports would fall off. 

In this manner, prices of standard commodities are 
fixed in world markets, because the condition of one market 
offsets that of the other and usually prevents standard 
great price fluctuations. While, normally, prices pHces - 
largely depend on conditions of production, they them- 
selves determine the movement of international trade, and 
this, in turn, brings about an equilibrium in price. Thus, 
in response to the difference in prices at two centers, wheat 
may be shipped from one country to another, — a move- 
ment which will ultimately result in this difference in price 
being largely eliminated. With increased exportation 
(demand), low prices gradually rise; and with increased 
importation (supply), high prices gradually fall. The 
cable, the telegraph, and telephone easily make known these 



378 American Economic Life 

differences and a gradual equilibrium in price is ultimately 
effected. 

Another unique feature of international trade is the fact 
that it is carried on largely without the use of money. 
Method of The exports of a country are used chiefly to 
payment. p a y f or fo imports. If the two amounts always 
balanced, little money would be needed in international 
trade transactions. When exports are greater than im- 
ports, however, some method of payment must be devised. 
For example, if, during a certain period, the United States 
exports to England $100,000,000 worth of goods and 
imports from England $75,000,000 worth of goods, Eng- 
land at the end of that time owes the United States $25,- 
000,000. As we have seen in a previous chapter, the usual 
method of paying this balance of trade is through bills of 
exchange which make the actual transportation of large 
sums of money across the water unnecessary. Occasion- 
ally, however, gold may be shipped from one country to 
another either to settle a trade balance, or to obviate the 
payment of high rates on bills of exchange. 

At this point it may be well to explain what is meant by 
the rate of exchange. Ordinarily, the pound sterling ex- 
changes for $4,866 in American gold. In normal and peace- 
ful times, the exchange is often effected at par, or with but 
a slight fluctuation of two or three cents above or below 
par. That is, the pound may exchange for $4.88 or for 
$4.84. When trade relations are greatly disturbed through 
war or some other abnormal condition, the difference in 
the relative values of these two units may, however, vary 
considerably ; and, in that event, the rate of exchange may 
fall to an unprecedented degree. For example, shortly 
after the World War the pound sterling, for a brief period, 



International Trade 379 

exchanged for only $3.25. Under these circumstances, 
England was practically forced for a time to stop purchasing 
goods in American markets. The rate of exchange was so 
disadvantageous to England that she could not afford to 
pay for goods in a market where the value of the pound 
had fallen so low. However, this situation eventually 
remedies itself by forcing an equilibrium in trade con- 
ditions. With low rates of exchange, exports fall off and 
imports increase, so that gold becomes less plentiful and 
commodity prices gradually fall. 

In one form or another, certain restrictions have always 
been placed on international trade. In America, the 
Navigation Acts of Parliament were followed by 

Its rcstnc- 

the tariff acts of our own government, which tions: 
serve indirectly to restrict freedom of com- c ^ e f 
merce. Of course, a tariff for revenue only is 
but a slight restriction on international trade. However, a 
protective tariff forms a considerably greater obstruction to 
commerce, while retaliatory tariffs and tariffs so high as to 
become prohibitive prove effectual barriers to the free 
development of international trade relations. 

The purpose of restricting commerce through a protective 
tariff is obvious. Suppose, for example, a foreign manu- 
facturer can produce, transport, and sell steel 

Protection. 

rails to an American firm at a rate lower than that 
of the American steel producer. Under these circum- 
stances, the American manufacturer will either have to 
invent a cheaper process of manufacture or be forced out 
of business. The first he may be unable to do. Therefore, 
to protect him, the government passes a tariff act which 
makes it possible for him to manufacture steel rails 
profitably without being undersold in his own market. 



380 American Economic Life 

In order to develop home manufactures, cheaper foreign 
goods are thus displaced by more expensive native prod- 
ucts. Whenever the manufacturers of one nation are 
unable to compete successfully with those of another, 
artificial barriers in the form of tariff laws may be enacted 
for their protection. 

A policy of protection thus attracts labor and capital to 
employments that would otherwise be unprofitable. Since 
the amount of the tariff levied is at least sufficient to cover 
the difference between the cost of production at home and 
abroad, such a policy makes possible the development of 
" infant industries." Without this protection, the growing 
industries of a country would succumb under the pressure 
of foreign competition. Furthermore, a protective tariff 
makes it possible, in the industries protected, to maintain 
the same level of wages as exists in other occupations. Since 
the protection afforded, however, applies practically only 
to manufacturing, mining, and in some special cases, 
agricultural industries, it cannot be said that a protective 
tariff is the cause of a generally high level of wages. So 
far as wages are concerned, the tariff affects, perhaps, 
only one-tenth of the laboring population of the United 
States. 

As opposed to the benefits derived from a system of pro- 
tection, a tariff policy entails certain disadvantages. Besides 
increasing the cost of production, such a policy may de- 
crease the sum total of wealth produced in a community. 
This situation follows from the fact that, without the arti- 
ficial protection, labor and capital would flow into those 
channels of production which offer naturally the greater 
returns. The higher prices charged for the domestic 
goods, produced in competition with foreign manufacturers, 



International Trade 381 

also add greatly to the burden placed on the consumer. 
In other words the home manufacturer frequently derives 
great profits at the expense of the general public. Further- 
more, the manufacturer often attempts to maintain the 
high level of profits, secured through protection, by re- 
sorting to practices of favoritism and " log-rolling " in 
politics. Thus, the tariff has sometimes developed into an 
instrument which is used, not for stimulating infant indus- 
tries, but for aiding industries that have become almost 
monopolistic. Under these circumstances, the most equi- 
table method of regulating a protective tariff is probably 
found in the establishment of a non-partisan Tariff Com- 
mission, which has the power to fix the duties in accordance 
with the actual needs of the industries of the country. 

A free trade policy attempts to remove the restrictions 
on international trade, except in so far as they may be 
necessary for purposes of revenue. The object 

,.,",.,. . , Free trade. 

of such restrictions is not to protect industries, 
but to raise revenue. When taxes are levied on imports, 
they are therefore usually laid upon non-competitive prod- 
ucts. Such a policy of free trade results in the production 
of more goods, cheaper goods, and perhaps better goods. 
Increased production results from the fact that, under a 
system of free trade, labor and capital always seek those 
industries having the greatest comparative advantages. 
Under these circumstances, the goods produced are likely 
to be of superior quality ; and, because they are tax-free, 
they are comparatively cheap in price. Free trade is the 
logical consequence of the doctrine of local fitness, and the 
result of a world-wide geographical application of the 
principle of division of labor. 

From a political standpoint, however, the doctrine of 



382 American Economic Life 

free trade has one serious defect which, in the minds of 
many statesmen, outweighs all its benefits. Free trade 
assumes a permanent state of normal and peaceful rela- 
tions existing among all nations. This theory, like that of 
universal peace, is adapted to an ideal and perfect state 
of human nature. Protection, on the other hand, is based 
upon the doctrine of nationalism, and is adapted to the stern 
realities of everyday life. Protection gives to a nation, 
equipped with proper natural resources, the power to 
develop itself into a complete, self-sustaining economic 
unit. Free trade makes one nation dependent upon an- 
other for many necessaries of life ; protection enables a 
nation to be strong and powerful in times of international 
crises. To make clear our meaning, we have but to recall 
the life-and-death struggle through which the world has 
lately passed, and to realize how much depended, in that 
conflict, upon a nation's ability to be supremely self-con- 
tained and self-supporting in all vital respects. 

In conclusion, we may reiterate that the principle of 
protection comes into conflict with the principle of local 
The fitness, which is the basis of the doctrine of free 

conclusion, trade. Under normal conditions, there is no 
doubt that free trade is beneficial to a community. In 
addition to widening the sphere of friendly commercial 
intercourse, it results in larger and cheaper production 
and in better products. However, protection itself results 
in national benefits. Chief among these is its creation, in 
our own country, of a complete and self-sustaining economic 
unit. Should the United States, at any time, be cut off 
from the rest of the world, comparatively little difference 
would be felt in the amount and character of the goods 
consumed. By encouraging the production of goods essen- 



International Trade 383 

tial to industrial greatness, protection has placed the 
United States in a position of economic independence. 

QUESTIONS FOR RECITATION 
t 

1. Why do men trade ? 

2. Explain the difference between individual trading and com- 
munity trading. 

3. Why did foreign trade develop ? 

4. What is the primary basis of international trade ? 

5. Explain the part played by comparative advantages in de- 
termining international trade. 

6. Explain the factors disturbing free international trade. Which 
is most important ? 

7. Name the chief items in our export and import trade. 

8. Explain what is meant by the " balance of trade." What 
effect has this on prices ? 

9. Can a nation always have a favorable balance of trade ? Ex- 
plain your position. 

10. What effect had the World War upon our balance of trade? 
How is the future likely to affect it ? 

n. Explain the meaning of world markets. How have they 
developed ? 

1 2 . What effect have world markets upon prices ? Explain clearly. 

13. How are prices in world markets automatically adjusted? 

14. How are goods paid for in international trading? When 
is gold used? 

15. Explain what is meant by the rate of exchange. How may 
it affect exports and prices ? 

16. Name the chief kinds of restrictions on trade. 

17. State the relative advantages and disadvantages of free trade 
and protection. 

PROBLEMS FOR DISCUSSION 

1. Is foreign trade extensive in the South Pacific cannibal 
islands ? Why not ? 

2. In foreign trade, is one nation the loser and another the 
gainer ? 



384 American Economic Life 

3. May both nations gain from international trade? 

4. What are the advantages of international trade ? 

5. If Canada were annexed to the United States, would the char- 
acter of the trade between the two regions be changed ? 

6. Would a rise in prices such as took place during the World 
War increase imports ? Explain your answer. 

7. When China becomes modernized, may the United States 
expect to export large quantities of manufactures to that country? 
Of agricultural products ? Why or why not ? 

8. How is a country like England, which has no gold mines, 
supplied with gold ? 

9. Would you expect gold to have a lower value in Alaska than 
in England? Why? 

10. Why do we not have export duties in the United States? 

11. What is the distinction between a protective tariff and a 
tariff for revenue only ? 

12. What is protection? Why did t,he United States adopt this 
policy in its early history ? 

13. What is free trade ? Why did England adopt this policy ? 

14. Is the same tariff policy equally good for all nations? Why 
not? 

SUPPLEMENTARY READING 

Ashley, P. Modern Tar if History. 

Bastable, C. F. Theory of International Trade. 

Brown, H. G. International Trade and Exchange. 

Escher, F. Elements of Foreign Exchange. 

George, H. Protection or Free Trade. 

Patten, S. N. The Economic Basis of Protection. 

Taussig, F. W. Tariff History of the United States. 



CHAPTER XXXVIII 
Taxation 

I. Division of taxation 
i . Federal taxation : 

a. Customs duties : 
(i) Kinds of duties 
(2) Articles taxed 

b. Excise taxes : 

(1) Meaning of excises 

(2) The articles usually taxed 

(3) Other goods taxed 

c. The income tax : 

(1) The first acts 

(2) Act of 1919 

d. Excess profits tax 

2. State and local taxation : 

a. The character of each 

b. The general property tax 

II. Principles of taxation 

1. Purpose of taxation 

2. Principle of apportionment 

3. Burden of taxation : 

a. Indirect taxes : 

(1) How their payment is shifted 

(2) Who bears the burden 

b. Direct taxes 

c. The conclusion 

Division of Taxation. — Closely connected with the sub- 
ject of trade is the question of taxation. In fact, while 
the primary purpose of protective tariffs is the encourage- 

385 



386 American Economic Life 

ment of home industry by the imposition of restrictions 
on international trade, tariff acts serve as effective instru- 
ments of taxation and are therefore very gen- 
Federal „ , , , , 
taxation: erally employed by modern governments to 

Customs produce the revenue required for their mainte- 
nance. In the United States tariff or customs 
duties are levied exclusively by the Federal government 
because Congress has sole power to regulate trade with 
foreign nations. Before the World War over two-fifths of 
the revenue of the United States was derived from customs 
duties. These duties are either specific or ad valorem, 
according as to whether the bulk or the value of the com- 
modity is taxed. In the United States, the number of 
articles on which it is customary to levy such duties is very 
large. Chief among them are wool, sugar, silk, molasses, 
iron and steel, cotton, tobacco, flax, chemicals, glass, 
leather, earthenware, and jewelry. Thus it will be noticed 
that not only luxuries, but many necessaries of life, are 
ordinarily subject to this kind of taxation. 

But while the tariff has yielded a large revenue, the 
income derived from excise taxes in the United States has 
been equally important. Excises are taxes laid 
on articles consumed, sold, or manufactured 
within a country, and the revenue they yield is known as 
" internal revenue." The commodities most usually sub- 
ject to this kind of taxation are tobacco and other luxuries. 
Because they are non-essentials, these goods are heavily 
taxed, and yield great revenues. However, these are not 
the only classes of goods subject to an excise tax. For 
example, oleomargarine, filled cheese, mixed flour, and 
adulterated butter have been included in this kind of taxa- 
tion. When, too, during times of great necessity, it has 



Taxation 387 

been found necessary to increase our internal revenue, 
special taxes have been laid on various articles not ordi- 
narily taxed. During the Civil War, nearly all forms of 
luxury were subject to taxation; during the Spanish- 
American War, playing cards, patent medicines, and legal 
documents were taxed ; and, during the World War, this 
system of taxation was extended to automobiles and auto- 
mobile accessories, to pianos and musical instruments, to 
tennis rackets and sporting goods, to furs, yachts, motor 
boats, and a host of other commodities regarded as luxuries. 
However, with the adoption of the income tax amend- 
ment to the United States Constitution in 1913, and with 
the outbreak of the World War in 1914, there The income 
came into operation a new source of taxation tax - 
exceedingly rich in its possibilities for producing revenue. 
Twice before Congress had attempted income taxation; 
but the second attempt — the Act of 1894 — had been 
declared unconstitutional by the Supreme Court of the 
United States. With its constitutionality assured by the 
amendment of 19 13, Congress passed the income tax act 
of that year, which applied to incomes of single persons of 
over $3000, and to incomes of married persons of over 
$4000. This act laid a normal tax of one per cent on such 
incomes, and also a graduated surtax, or additional tax, 
of from one to six per cent on incomes in excess of $20,000, 
the highest rate applying to the excess of incomes above 
$500,000. Because of the reduction of revenues from cus- 
toms duties due to the World War, this act was revised 
in 191 6, and again, in 191 7. The Act of 191 6 increased 
the normal rate from one to two per cent, and the surtax 
rates were fixed at from one to thirteen per cent, the latter 
rate applying to the excess of incomes above $2,000,000. 



388 American Economic Life 

The Act of 191 7 raised these rates still higher, placing the 
normal rate for individuals at four per cent, and adding 
to the existing surtax a war surtax ranging from one to 
fifty per cent. On incomes in excess of $2,000,000, there- 
fore, the new tax reached a total of sixty-seven per cent, 

In 1919, to meet the accumulated necessities of war, this 
act was further revised, and the revenues under the act 
thereby increased. A single set of normal and surtax 
rates was substituted for the former double system of 
reckoning old and new normal and surtax rates. The 
limits of exemption were placed at $1000 for single men 
and $2000 for married couples. The normal rate was 
fixed at six per cent for the first $4000 of taxable income, 
and at twelve per cent for incomes in excess of that amount. 
The surtax rates ranged from one to sixty-five per cent, and 
were made applicable to the excess of incomes above 
$5000. The progressive principle was, therefore, not only 
retained, but applied in a still higher degree. As a conse- 
quence, the excess of income above $1,000,000 was to be 
taxed the maximum rate of seventy-seven per cent. It is 
certain, however, that, with the adjustments in taxation 
following the World War, the normal tax rates will be re- 
duced, the Act of 1919 having provided for a reduction of 
one-third of the rates of the normal tax for 1920. 

The World War revealed the possibilities of still another 
source of revenue. This was found in another kind of 
Excess prof- income tax which has become popularly known 
its tax. as tkg excess profits tax. This tax was first 

levied in 191 7, and then revised in 191 9, when it was made 
to apply to corporations only. This tax was levied at the 
rate of twenty per cent on earnings exceeding eight per cent 
of the corporation's invested capital, and of forty per cent on 



Taxation 389 

earnings exceeding twenty per cent of its invested capital. 
The revenue derived from the excess profits tax and the 
income tax, which are combined in the first Treasury Re- 
ports, has been enormous. In 1918, their total collections 
amounted to nearly $3,000,000,000 ; and, in 1919, to nearly 
$4,000,000,000. Just what will be the future of this tax 
is, however, problematical. Like the income tax, the excess 
profits tax is almost certain to be modified after the country 
has passed from a war to a peace basis. However, inas- 
much as the war left the United States with a debt of 
$24,000,000,000, some effective means of providing neces- 
sary revenues must be devised. Since these two sources 
of taxation produced three-fifths of our revenue in war 
times, they may still be largely relied upon to yield the 
revenue required in the period of transition. 

Coming now to the subject of state and local taxation, 
we find that there are likewise certain well-defined ways 
in which the states and local units secure their _ 4 

State and 

revenues. The states rely usually upon the local taxes: 
general property tax and taxes levied upon Character 
corporations, licenses, and inheritances ; while 
the local units also depend largely upon the general prop- 
erty tax, as well as poll taxes. Therefore, the general 
property tax, which the Federal government does not em- 
ploy, is the main source of both state and local revenue. 
This tax is laid nominally upon all property, both real and 
personal, owned by taxpayers, and yields approximately 
seventy-five per cent of all state and local receipts. 

Everywhere the general property tax is in evidence. 
Assessors value the property; governing bodies fix the 
tax rates; and local authorities collect the taxes. This 
general property tax, although intended for both real 



390 American Economic Life 

estate and personal property, does not effectively reach 

personal property. The reason for this is obvious. Land 

and houses cannot be hidden from the eye of 

General 

property the tax collector, but personal property may be 
readily concealed. This phase of the tax, there- 
fore, has the effect of discriminating against truthful and 
conscientious citizens. 

Principles of Taxation. — All systems of taxation, 
whether national or local, should be made to conform to 
Purpose of certain general principles. In the first place, 
taxation. since a tax is a compulsory payment made by an 
individual for the support of government, its purpose should 
be public. Otherwise, as in the past, if taxation were 
employed for private purposes, it would constitute a form 
of robbery and spoliation. So long as the proceeds of 
taxation went into the pockets of kings and nobles and 
were spent by them in riotous living, taxation meant rob- 
bery. To-day, however, although the national govern- 
ment is obliged to spend large sums of money for purposes 
of protection and maintenance, the state and local govern- 
ments devote their incomes largely to the advancement 
of education, general security, and social improvements. 
Among the latter, better streets, cleaner water, and more 
playgrounds are assuming greater importance. Increased 
taxation may therefore mean higher social welfare. 

Another important point to be considered in any system 

of taxation is the principle according to which taxes should 

be apportioned throughout the community. On 

ofappor- this question there are two opposing theories. 

tionment. Q n ^ one j ian( j^ ft j s ma i n tained that taxes 

should be levied according to special benefits received; 
on the other, it is held that they should be laid in propor- 



Taxation 391 

tion to ability to pay. If taxes were levied according to 
the first principle, those receiving most benefits — the poor 
and needy — would be taxed most heavily. This would 
evidently be unjustly burdensome to this class. If, how- 
ever, taxes were laid in proportion to ability to pay, those 
enjoying the comforts of life — the rich and well-to-do — 
would contribute largely to the support of government. 
At the same time, the mere existence of government would 
confer a very great benefit on these wealthy classes and 
justify their large contributions to public support. There- 
fore, we must conclude from the standpoint of social welfare, 
that ability to pay, not benefits received, should be the 
determining factor in apportioning taxes. 

Directly connected with this subject of apportionment 
is the question of the burden of taxation. A tax may be 
intended for one person but paid by another. 
That is, the first taxpayer may shift the pay- taxation: 
ment of the tax to another, and, in this manner, indirect 

taxes. 

make the burden of taxation fall on some one not 
originally intended. Taxes which may be shifted are 
usually spoken of as indirect taxes, while those which may 
not are called direct taxes. Customs duties are typical 
of indirect taxes. They are levied on foreign manufactures 
and are originally paid by the importer of the goods ; but 
the importer, in turn, shifts their payment to the consumer 
in the form of higher prices. Meanwhile, if the consumer 
decides to buy the domestic article, he finds of course that 
its price has correspondingly increased. Therefore, whether 
he buys the domestic or imported article, the burden of 
this tax falls on the consumer. If he does not actually 
pay it to the government, he does in reality to the home 
manufacturer. Formerly, in the United States, since 



392 American Economic Life 

customs duties were so generally levied in the country and 
since they fell so largely upon commodities in common use, 
like sugar and woolen goods, the burden of taxation rested 
chiefly upon the poor. This was further accentuated by 
the fact that excise taxes, which may also be shifted, were 
heavily laid on tobacco and liquors which, before the advent 
of prohibition, constituted an important item in middle 
class consumption. 

On the other hand, direct taxes are taxes which cannot 
readily be shifted. The best examples of these are poll 
taxes, taxes on land, and on incomes. Since 
these taxes" must be paid directly by the in- 
dividual owning the property or income, it is difficult to 
shift their payment upon some one else. The direct tax, 
therefore, reaches the person intended. Before 19 13, it 
was practically impossible for the national government 
to employ this form of direct taxation so far as individual 
incomes were concerned. It is true that, in Civil War 
times, Congress had passed an income tax law, and the 
Supreme Court had declared it constitutional. But, in 
1894, Congress passed another such law and the Supreme 
Court declared it violated the constitutional provision re- 
quiring direct taxes to be apportioned among the several 
states " according to their respective numbers." Since 
the direct tax could not be utilized, the burden of taxation 
continued to fall, at that time, upon the poorer classes. 

Recently, however, this situation has been entirely 
changed. In 1913 an amendment to the United States 
The Constitution disposed of the legal difficulties in 

conclusion. ^ e wa y f levying an income tax, and Congress 
accordingly enacted such a law. The great burden of taxa- 
tion imposed on the poor by means of duties and excises 



Taxation 393 

was thus offset by the direct taxation of the wealthier 
classes. The income tax was the most simple means of 
bringing about this more just apportionment. While the 
well-to-do classes are also subject to the general property 
tax of the state and local governments, the concealment 
of stocks and bonds and other personal property offers 
frequent opportunity for escaping just taxation. The in- 
come and excess profits taxes cannot, however, be equally 
well evaded. 

QUESTIONS FOR RECITATION 

1. Name four kinds of federal taxes. Define each. 

2. What is the difference between ad valorem and specific duties? 

3. Name the articles usually subject to customs duties. State 
the reason in each case. 

4. What are excises? What goods are subject to this form of 
taxation ? 

5. During World War times how was taxation extended ? Were 
legal transactions taxed? Give examples. 

6. What were the chief sources of federal taxation before the 
World War? After the World War? What made the change pos- 
sible ? Why was it necessary ? 

7. Explain the provisions of the revenue tax law of 1913. 

8. When and why was this act revised? What was the effect 
each time ? 

9. Explain clearly the provisions of the Revenue Act of 1919. 

10. What is the excess profits tax? How much revenue did this, 
with the income tax, yield the United States in war times ? 

11. Do you think these two forms of taxation need revision? 

12. What is the chief source of state and local revenues? Name 
some other sources. 

13. Explain the chief defect in our system of state and local taxa- 
tion. How would you remedy it ? 

14. What should be the purpose of taxation ? Why? 

15. How should taxes be apportioned or distributed throughout 
the community? Why? 



394 American Economic Life 

16. Explain the difference between direct and indirect taxes, 
giving examples of each. 

17. What is meant by the "burden of taxation"? How is it 
affected by direct and indirect taxation? 

PROBLEMS FOR DISCUSSION 

i. What are the reasons for changing tariff duties from time 
to time ? 

2. Explain the attitude of the different sections of the country 
toward the tariff. 

3. What advantages does a system of customs duties offer as a 
means of raising revenue ? 

4. Would customs duties be a satisfactory source of revenue for 
the United States in time of war? 

5. Make a list of the disadvantages of a system of customs 
duties. 

6. Who bears the burden of a revenue tariff? 

7. Who bears the burden of excise taxes? 

8. Who bears the burden of an income tax? 

9. Should incomes below a certain amount be exempt from 
taxation ? Why ? 

10. How high a rate should you approve in taxation of inherit- 
ances ? 

11. What effect had the World War upon our system of taxa- 
tion? 

12. What are the chief characteristics of our system of state and 
local taxation? 

13. How may taxation affect the problem of surplus wealth? 

14. What do we mean by a progressive income tax? 

15. What tax, or taxes, do you think will usually form the main 
source of our national revenue ? Why ? 

16. Why did we not make general use of income taxes earlier in 
our history? 

17. In the past, what was the chief defect in our system of federal 
taxation? How has it been remedied ? 



Taxation 395 

SUPPLEMENTARY READING 

Adams, H. C. Science of Finance. 

Bullock, C. J. Selected Readings in Public Finance, Chaps. VII- 

XIX. 
Ely, R. T. Taxation in American States and Cities. 
Seligman, E. R. A. Essays in Taxation. 
Seligman, E. R. A. The Income Tax. 
Taussig, F. W. Principles of Economics, Book VIII. 
West, M. The Inheritance Tax, Chaps. VII and IX, 



PART FIVE 
PROBLEMS OF DISTRIBUTION 

CHAPTER XXXIX 
A Survey of Distribution 

I. Nature of distribution 
i . Meaning of distribution 

2 . The shares in distribution : 

a. How they arise 

b. What they are called 

3. Inequalities of income : 

a. Causes : 

(1) Differences in productivity 

(2) Monopoly of land 

(3) Monopoly of capital 

(4) Exploitation of labor 

b. The consequences 

c. Some examples 

II. Groups of distribution theories 

1 . The productivity theory : 

a. Its basis 

b. What it advocates 

2. The monopoly theory : 

a. Its basis 

b. What it advocates 

3. The conclusion 

In our treatment of American economic life thus far, we 
have considered the problems arising from the consumption, 
production, and exchange of wealth. The chapters de- 

396 



A Survey of Distribution 397 

voted to a discussion of the mechanism of exchange have 
shown us that this phase of economics, in common with 
all its other parts, is intimately connected with the subject 
of individual and social welfare. There still remains one 
phase of wealth that we have yet to consider ; that is, the 
problem of its distribution. 

Nature of Distribution. — The problem of distribution 
deals with the principles according to which the wealth of 
society is distributed among the factors which Meaning of 
have produced it. Just as the principles of distribution, 
exchange deal with the mechanism whereby goods are 
transferred from one person to another through the medium 
of money, credit, trade, or some similar device, so the 
principles of distribution are concerned with the manner 
in which land, labor, and capital receive the shares of the 
wealth created by their united action. In this sense, 
distribution must not be confounded with the process by 
which goods are transferred from place to place, or from 
person to person. Furthermore, the problem of distri- 
bution deals primarily with the shares assigned to the 
factors of production, and not with the incomes of indi- 
viduals. But, since the institution of private property 
legalizes the ownership of these shares in the hands of 
private individuals, the question of personal income is 
inseparably connected with the distribution of these 
shares among the factors of production. 

To the student of distribution, two questions naturally 
present themselves : How is wealth created ? How is this 
wealth distributed ? If three men build a boat, the value 
of this boat is divided among the factors entering into its 
production. If, however, instead of a boat, all the wealth 
of society is to be considered, it becomes necessary to in- 



39§ 



American Economic Life 



quire in detail what factors produced this wealth in order 
to know how its money value should be distributed. The 
The shares factors which produce wealth are land, labor, 
J? ^ stnbu " and capital. Therefore if land, labor, and capi- 
How tal have produced the wealth of society, these 

they arise. same factors must be entitled to its use and 
enjoyment. This is the basis of the distribution of wealth 
throughout society. Each factor of production is entitled 
to a share in distribution by reason of the part it has played 
in production. 

In order clearly to distinguish these shares from one 
another, the science of economics differentiates them by 
What they distinct phraseology. That is, it applies a 
are called. separate term to the share of wealth received by 
each of the factors of production. The terms employed 
must not be confounded with the popular meaning some- 
times attributed to them. The name of land's share is 
rent; of capital's share, interest; of labor's share, wages. 
As we have said, the basis for the existence of these shares 
lies in the productive power of the agents creating them. 
These factors of production and shares in distribution may 
be represented in a simple manner by the following diagram : 



Shakes in Distribution 


Rent 


Interest 


Wages 


| We 


alth or | Goo 


ds | 


t 

Land 


X 

Capital 


Labor 



Factors of Production 



In our further discussion of this problem it will be shown 
that certain modern conditions interfere to prevent the shares 



A Survey of Distribution 399 

in distribution from corresponding exactly to the respective 
parts played by the factors of production ; that other ele- 
ments enter not only into production but also into distribu- 
tion; and that these shares themselves, as the diagram 
might seem to indicate, are by no means equal in amount. 
We have said that, because of the institution of private 
property, the question of the shares of wealth created by 
the factors of production is inseparably inter- i neq uauties 
woven with the problem of individual incomes, of income: 
For example, rent, although created by land, is The causes - 
appropriated by the landlord ; interest, although produced 
by capital, is enjoyed by the capitalist; while wages, the 
rewards of labor, are naturally appropriated by laborers. 
Therefore, if rent and interest increase rapidly and wages 
do not, the income of landlords and capitalists will rise, 
while that of laborers may remain stationary. These 
inequalities of wealth and income constitute a very real 
factor in the life of every modern community. Fifth 
Avenue stands out in sharp contrast to the lower East 
Side. Compared to the adversity of the many, the pros- 
perity of the few is exceptional. Here, for example, is 
one family with an income of a thousand dollars a month, 
and there another, struggling to maintain itself on a thou- 
sand dollars a year. What, then, are the causes of this 
great inequality of income? Many explanations and 
suggestions have been offered to account for this difference 
of social income, but there is little harmony of opinion 
among writers as to its ultimate cause. However, in 
America, four factors seem to stand out as prominent and 
Striking causes of such inequality : (1) differences in pro- 
ductive capacity, (2) monopoly of land, (3) monopoly of 
capital, and (4) exploitation of labor. 



400 American Economic Life 

One of the most important causes of difference of income, 
that is, of difference in the distribution of the product of 
industry, is found in varying productive capacity. In 
the last analysis, the amount of wealth that can be dis- 
tributed throughout a community depends upon the 
amount of wealth that can be produced. The amount of 
wealth produced will depend largely upon the abundance 
and fertility of natural resources and upon the efficiency of 
labor. When natural resources are plentiful and properly 
utilized, it is evident that the sum total of the product to 
be divided will be greatly increased. Similarly, when labor 
is intelligent and adequate, the amount of wealth produced 
will be favorably affected. In the former case, however, 
land's share would naturally increase, while in the latter 
case, labor would correspondingly benefit. But, when- 
ever labor is unproductive or inefficient, its relative share 
in wealth distribution will suffer. Many inequalities in 
income, therefore, are due to shiftlessness, idleness, or 
inefficiency in labor. Such differences are perfectly clear 
and explainable. On this basis, if one man's income is 
one thousand dollars a year, and another's ten thousand 
dollars a year, the difference is due to the fact that the 
first laborer has but one-tenth the productive capacity of 
the second. Labor is thus held responsible for its own 
condition. 

Opposed to this explanation of inequalities of income, 
we have the view of those who primarily attribute such 
inequalities to the factors of monopoly and exploitation. 
The effect of the monopoly of natural resources upon wealth 
distribution may be readily discerned. No one can fail 
to see the social importance of this monopoly control. 
Since prosperity is directly dependent on natural resources, 



A Survey of Distribution 401 

every effort should be made to extend the use of natural 
resources to all members of the community. If, however, 
these resources should be monopolized, or withheld from 
use by a few individuals, the great mass of people would 
either be deprived of natural advantages, or forced to pay 
exorbitant prices for the enjoyment of their products. 
Through the monopoly of land, prices may be so controlled 
as to deprive the consumer of a large part of his income. 
Thus, very real inequalities of income may result. 

Monopoly price, arising from the monopoly of natural 
resources, is thus one means of shifting income from one 
class to another. But the determination of monopoly 
price does not depend entirely upon the monopoly of 
natural resources. Monopoly of capital is also a factor 
in determining monopoly price and in bringing about 
huge monopoly incomes. The concentration of great 
masses of capital in the hands of a few individuals gives 
them a tremendous advantage in fixing prices, and in divert- 
ing incomes from others to themselves. Likewise, special 
privileges, secured through patents and copyrights, play 
an important part in creating inequalities of income. 

Because of this monopoly power, some writers maintain 
that the wealth of one group in society often increases at 
the expense of another. They take the view that, if certain 
men receive more than they produce, others receive less 
than they produce. Setting aside, for the moment, the 
monopoly power that comes from exceptional capacity or 
unusual training, it is maintained by this school of writers 
that the monopolist, deriving his power through an excep- 
tional control over land or capital, is reaping where he has 
not sown, that is, securing value which he has not produced. 
If, therefore, labor has produced this value and is deprived 



402 American Economic Life 

.of it, the monopolist is charged with exploiting labor for 
his own benefit. In this manner, monopoly of land, mo- 
nopoly of capital, and exploitation of labor constitute, in the 
opinion of these writers, a series of causes which explain 
many of the inequalities in income. 

Despite any difference of opinion regarding the causes of 
these inequalities of income, there can, however, be no 
The come- doubt of their existence and consequences. We 
quences. have seen that a standard of living is determined 
largely by wages, and we now see that wages is a part of 
the problem of distribution. Therefore, inequalities of 
income have a direct effect upon standards of living. While, 
to-day, comparatively few individuals have such great 
incomes as to permit the development of the highest possible 
economic standards, large numbers of people are existing 
on a standard of living which does not satisfy the re- 
quirements of modern life. As a consequence, the children 
of these families are likely to grow up to be inefficient in- 
dustrial workers. 

While the fruits of modern economic progress have not 
been wholly confined to a small class, it is nevertheless 
Some true that there is a surprising amount of poverty 

examples. existing in America. On this point, the report 
of the United States Commission on Industrial Relations, 
issued in 191 5, said, " It is certain that at least one- third, 
and possibly one-half, of the families of wage-earners em- 
ployed in manufacturing and mining earn in the course of 
the year less than enough to support them in anything 
like a comfortable and decent condition." On the other 
hand, the income tax returns for the calendar year 191 7 
showed that 3,472,890 persons reported net personal in- 
comes in excess of $1000. At the same time the returns 



A Survey of Distribution 403 

showed 1015 incomes in excess of $300,000, and 141 in- 
comes of $1,000,000 or over per year. The fact of inequali- 
ties in income is therefore conclusively established. 

Groups of Distribution Theories. — Unfortunately, econ- 
omists do not agree on one single theory of distribution. 
In fact, opinion has been so divided that many 
conflicting theories have been advanced from ductivity 
time to time. In general, however, theories of eory ; 

,. ., . ,,..,,. Its basis. 

distribution may at present be divided into two 
main groups, (1) those emphasizing productivity, and (2) 
those stressing monopoly as a determining factor in the 
problem. While both these schools of writers believe in 
social justice, they vary in their explanations of the causes 
of inequalities of income. The productivity school bases 
its theory on competition and productive capacity. Its 
followers hold that certain natural laws tend to produce 
given results. One of these natural laws, competition, 
will result in a just system of distribution provided it be 
left free to work itself out. In the absence of competition, 
distributive justice is obviously impossible ; but, were 
competition widespread, a just system of distribution 
founded on productive capacity would be inevitable. 

Proceeding on this basis, the productivity theorists apply 
their system to modern society through the program of 
government regulation. They admit the pres- what it 
ence of monopoly but direct all their efforts advocates - 
towards its abolition, because they believe that only through 
competition will justice be realized. That is, they advo- 
cate government regulation of industry. This theory 
holds that the shares in distribution are determined exactly 
by the productivity of the factors. That is, if a tin dipper 
costs ten cents, and if natural resources contributed two 



404 American Economic Life 

cents to its production, under a strictly competitive regime, 
natural resources would be paid two cents in rent. In the 
same way, if labor contributed four cents, labor would 
receive four cents as wages. Thus, if competition can be 
made free, society will naturally right itself by the action 
of this universal law. 

The monopoly theory of distribution, in distinct contrast 
to this productivity theory, looks upon monopoly as the 
factor of prime importance and as the logical 
monopoly outcome of present social development. Social 
theory: evolution, it is asserted, has reached a stage in 
which monopoly is inevitable. This school, 
therefore, takes the position that no person is to blame 
for modern industrial monopoly. Monopoly is not 
" wrong." It is merely a product of modern industrial 
conditions. In other words, monopoly is an economic 
law of modern society. Therefore, in solving the distribu- 
tion problem, monopoly, not productivity, is looked upon 
as of primary importance. According to the theories 
advanced by this group, if natural resources contribute 
but two cents to the actual production of the dipper, 
nevertheless, because of the monopoly which the owner of 
the natural resources possesses, the amount which goes 
to him may be three cents, — two cents representing the 
contribution of natural resources and one cent representing 
monopoly power. 

If the monopoly theory be true, the method of securing 
a more equal distribution of wealth lies in the increase of 
What it monopoly power rather than in its abolition. 
advocates. ^his sc hool, therefore, advocates increasing 
especially labor's monopoly power. Does the laborer feel 
that he is being unfairly treated by not securing the full 



A Survey of Distribution 405 

value of his work ? Or, does he think he is being exploited 
by his employer? If so, he has but one remedy. That 
is, he must secure through organization, education, or 
legislation some special monopoly power which will enable 
him to make headway against the monopoly power enjoyed 
by his employer. 

In contrasting these two theories, it may be said that 
the productivity theory of distribution is really a picture of 
what might be under ideal conditions of compe- The 
tition, while the monopoly theory is an attempt conclusion - 
to analyze things as they really are. For this reason the 
monopoly theory is regarded by some as furnishing a more 
adequate basis than the productivity theory for a dis- 
cussion of modern problems of distribution. While, there- 
fore, in the following chapters, the productivity theory of 
distribution will always be emphasized, mention will be 
made of the monopoly principle whenever it appears to 
be one of the determining factors in distribution. How- 
ever, in our study of distribution problems it is well to 
remember that frequently both of these principles are simul- 
taneously at work. 

QUESTIONS FOR RECITATION 

1. Explain clearly the meaning of "distribution." Show how 
it differs from exchange ; from transportation. 

2. What names are given to the shares in distribution? De- 
fine each. Show their relation to the factors of production. 

3. Are inequalities in shares the same as inequalities in incomes? 
How do they differ? How are they related? What is the reason 
for this relation ? 

4. Why do we have the landlord and the capitalist? What 
effect has each upon the problem of wealth distribution ? 

5. Name the primary cause of inequalities in income ; the sec- 
ondary causes. 



406 American Economic Life 

6. Show how each of the above causes produces inequalities of 
income. 

7. What inequalities are justifiable? Which are not? Why? 

8. Do you believe that most of the inequalities of income, to-day, 
are based on just or unjust causes ? Why ? 

9. Explain the consequences of inequalities of income. Give 
examples of such inequalities. 

10. Do you believe, to-day, that the rich are richer and the 
poor are poorer than they were a hundred years ago? State your 
reasons. 

11. What is meant by the productivity theory of distribution? 
Upon what does this theory depend ? 

12. What do the supporters of the productivity theory advocate ? 
Why? 

13. Explain the position of the supporters of the monopoly theory 
of distribution. What do they advocate ? 

14. Show the conditions to which these two theories are applicable. 

15. How may -these theories be blended in a discussion of the 
problems of distribution? Give some examples. 

PROBLEMS FOR DISCUSSION 

1. In economics should the emphasis be laid, to-day, rather on 
the subject of distribution or on that of production ? Why ? 

2. If a man produces one commodity, how does he satisfy his 
wants ? Upon what will his ability to satisfy his wants depend ? 

3 . What idea lies back of the expression " distribution of wealth " ? 

4. What are the different methods by which people obtain their 
incomes ? 

5. How can a chair be said to be distributed among the land, 
labor, and capital creating it ? 

6. What is the relation of private property to distribution? 
How is this illustrated in the case of land ? In the case of capital ? 

7. Was there any distributive problem when each household was 
economically self-sufficient ? Why not ? 

8. When we speak of the economic inequalities of to-day, do we 
mean inequalities of property or of income ? 

9. Is there any relation between political democracy and in- 



A Survey of Distribution 407 

dustrial democracy? What bearing has this problem upon dis- 
tribution? 

10. If a man cooperates with others in making a commodity, what 
determines the extent of the share he can secure ? 

11. Should a man be paid according to his ability or according to 
his needs ? Why ? 

12. What is the relation between distribution and production? 

13. Explain how our present system of wealth distribution might 
be changed (a) by law, (6) by revolution. Is either desirable ? 

14. Give some examples from history of such changes. 

15. How is the problem of distribution bound up with the problem 
of welfare ? 

16. What share in the distribution of wealth is not mentioned in 
this chapter? Why? 

17. Explain the relation between abundant natural resources 
and national prosperity. How would this affect the distribution of 
wealth ? 

SUPPLEMENTARY READING 

Carver, T. N. The Distribution of Wealth, Chap. II. 

Clark, J. B. The Distribution of Wealth, Chaps. VII-XIII. 

Commons, J. R. The Distribution of Wealth, Chap. Ill, pp. 252 seq. 

Hobson, J. A. The Social Problem, Chap. IV. 

King, W. I. The Wealth and Income of the People of the United 

States. 
Patten, S. N. The Theory of Prosperity. 
Taussig, F. W. Principles of Economics, Vol. II, Chap. LIV. 
Youngman, A. Economic Causes of Great Fortunes. 



CHAPTER XL 

The Theory oe Rent 

I. Nature of rent 

i . What rent means 

2. How rent is paid 

3. How rent arises : 

a. From differences of fertility 

b. From differences of location 

4. The conclusion 

II. Grades of land 

1. The usual grades 

2. The " no-rent " land 

3. How rent varies : 

a. Between grades 

b. Within a grade : 

(1) Marginal rent 

(2) Differential rent 

(3) An illustration 

c. The general principle 

d. Explanation of diagram 

e. Other applications of the law 

4. The danger 

Nature of Rent. — The most generally accepted and 
most firmly established theory of distribution is that re- 
What lating to rent. Rent is the return on natural re- 

"rent" sources, and, in economics, means the amount of 

wealth that " land " receives for its part in pro- 
duction. Therefore, from an economic standpoint, " rent " 
means something quite different from the sense in which 

408 



The Theory of Rent 409 

the word is used by the real estate broker. The latter uses 
the term to represent not only the return on land — the 
lot — but also the return on capital — the house. Real 
estate rent includes both rent and interest; economic 
rent signifies simply the return on land. This distinction 
is fundamental and must always be borne in mind. 

It is equally important to remember that rent exists 
regardless of the manner in which it is paid, or of the per- 
son to whom it is paid. For example, land may How rent 
receive its share of rent in the form of so many is paid - 
extra bushels of wheat, as well as in the form of money 
representing these bushels of wheat. Similarly, this rent 
is paid to land regardless of whether the land is used by 
the owner, or by the tenant. Since land cannot take this 
rent itself, some one takes it for the land. The landlord 
receives the rent. If he uses the land himself, he receives 
it in the form of extra crops ; if some one else uses it, he 
takes it in the form of money. When the owner and the 
user are two different persons, it may easily be seen that 
the payment of rent becomes more marked and socially 
significant. This fact is well brought out in the history 
of Ireland where, for centuries, rents have been exacted 
from the peasants by their English landlords. 

Since rent exists so generally, it is important to under- 
stand clearly how it arises. Rent arises because of differ- 
ences in the productive capacity of various lands. 
This difference in productivity may be due to a ^ e ™* 
difference in the fertility of the soil, or to a differ- From differ- 
ence in the location of the land. First of all, f e ^ lUy ° S 
picture in your mind two separate tracts of 
land, each an acre in size. Every spring the two farmers 
owning these tracts go out to plant their grain. They 



41 o American Economic Life 

may use the same quality of fertilizer, the same kind of 
grain, the same type of plow, and they may have the same 
efficiency in their labor force. In the fall, one farmer reaps 
twenty bushels ; the other fifteen. To what may we at- 
tribute this difference in yield of five bushels per acre? 
In all production there are three factors, — land, labor, 
and capital. On these two acres the capital and labor 
are, by assumption, respectively identical. This being the 
case, there remains but the third factor to which we may 
attribute this extra growth of five bushels. That is land. 
The extra return of five bushels is the income which we 
attribute to the better acre because of its superiority over 
the poorer one. Such an increase is termed " rent." Thus, 
rent arises because " land " aids man unequally in pro- 
duction. In one place it yields fifteen bushels, in 
another twenty. This difference in the yield constitutes 
the rent. 

! Again, let us picture to ourselves two retail stores of 

equal attractiveness so far as the buildings and goods are 

concerned, and each equally efficient in labor 

From atffer- x 

ences of and management. One is located on the out- 
skirts or edge of the business district ; the other 
is near the center of one of the busiest thoroughfares. 
At the end of the year, the net return of the one store 
may be one thousand dollars, while the net return of the 
other may be two thousand five hundred dollars. To what, 
then, may we attribute this difference in earning power 
amounting to fifteen hundred dollars per annum? The 
labor is equally efficient; the physical equipment of the 
stores is similar. The difference, then, may only be at- 
tributed to the third factor in production, namely, land. 
The income which we must attribute to this second store, 



The Theory of Rent 411 

because of its superiority in location over the poorer, we 
therefore call economic rent. 

Thus it may be clearly seen that the basis of rent is found 
in some form of land productivity. Without productivity, 
land would not be a factor in creating wealth, T he 
and rent would not exist as one of the shares conclusion, 
in distribution. In the first illustration, the extra pro- 
ductivity resulted from superior fertility, which gave rise 
to rent; while, in the second illustration, the additional 
productivity was the result of superior location, which 
again produced rent. Of course, superiority in productivity 
may be the result of a combination of both fertility and 
location, as is the case with trucking lands near great 
cities. Since rent arises from differences in the produc- 
tivity of land, we arrive at the conclusion that the rent of 
any given piece of land will be the difference between its 
yield or productivity and that of the least valuable land 
taken as a basis of comparison. 

Grades of Land. — The fact that lands vary in their 
productiveness is seen in city as well as in country districts. 
In the center of every great city, for example, The usual 
is the most valuable land, usually devoted to s rades - 
business purposes. Outside this business district we rind, 
roughly speaking, the circular belt of the residential dis- 
trict, which, though it has not quite the high social value 
of the business section, still plays an important part in the 
use that man makes of land. Then, beyond the confines 
of the city, is the land devoted to truck farming; still 
farther out lie lands devoted to general farming, and to 
grazing. 

There may still be land lying beyond the grazing land, 
which is least desirable for any of the uses to which man 



412 American Economic Life 

may put land, but which serves to catch the overflow 
of population, and is used by the less fortunate members 
" No-rent " of society who are willing to go on this poor out- 
land. lying land and work there for a bare living. This 

last type of land has earned the name in economics of " no- 
rent " land, — a term which implies that a man working 
on such land will merely get enough from his labor to allow 
himself his daily wage and a sum sufficient to pay for the 
use of the simple tools and seed that he may need in culti- 
vating it. Its fertility is so low that when a definite re- 
turn from the land is set aside to pay the wages of labor 
and the interest on capital, there is nothing left for rent. 
Hence the expression " no- rent " land. 

Broadly speaking, that class of land which has the highest 
social value will yield the largest amount of rent, and, in 
each class, that land which is superior will yield 
varies: the higher rent. Accordingly, all land used for 

Between business purposes yields a greater income than 
land used for residential purposes. This latter, 
in turn, yields more than land used for trucking, while 
trucking land yields more than land used for farming. 
Again, farming land is more valuable than land used for 
grazing, which, in its turn, brings in a higher return than 
" no-rent " land. 

It is apparent, however, that, though this general scheme 
of gradation of the size of rents holds good, there are many 
Within a variations in rent, and that no two pieces of land 
grade. m ^g same De lt pay exactly the same amount of 

economic rent. Hence, we speak of the poorest land of each 
rent-paying belt — the marginal land — as receiving a mar- 
ginal rent. If we take this poorest land as our basis, better 
land in the same class must pay a higher rent due to its su- 



The Theory of Rent 413 

periority. This additional rent is called the differential rent, 
so that in theory all land which is better, to however small 
a degree, than the poorest land in the belt pays a rent com- 
posed of these two elements, — a sum equal to the amount 
paid for the poorest land of its class, called marginal rent, 
and an additional sum proportionate to its superiority 
over that land, called differential rent. The two together 
equal the economic rent. 

To illustrate, one can imagine a piece of land just on the 
margin of the trucking belt adjacent to the general farming 
land. It is the poorest land used for truck farming and 
yields a rent of twenty-five dollars an acre. Half a mile 
nearer the city there may be a second farm which, because 
of its superiority, will have to pay an additional sum of 
ten dollars, making its full rent the sum of the marginal 
and differential rent, or thirty-five dollars. Still farther 
in toward the city we can conceive of the very best land 
used for this purpose lying adjacent to the suburban dis- 
trict. This farm, being near to the city markets, will 
have to pay an even greater differential rent, perhaps fifteen 
dollars, making in all a total economic rent of forty dollars. 

If, now, we go even farther toward the city, we immedi- 
ately pass into the next belt in our illustration, the residen- 
tial. The poorest land used for this purpose The genera i 
gives us the new marginal rent for that belt. It P ri ndpie. 
is obvious, however, that the entire rent paid for the 
poorest or marginal land in this belt must be a little higher 
than that paid for the best land of the next lower or truck- 
ing belt. If this were not so, the land in question would 
be put to truck farming again, because it would yield by 
that method a larger return. As a result, we have this 
general principle running throughout all rents, — the rent 



414 



American Economic Life 



of the marginal land of the next higher belt is always a 
little greater than the rent of the marginal land of the next 
lower belt plus its greatest differential rent. 

This entire theory of rent is usually illustrated by the 
following diagram: 










RENT ^ 






p 








n?t^j 


BUSINESS 
LAND 


RESIDENCE 
LAND 


TRUCKING 
LAND 


FARMING 
UND 


n; 

i 

GRAZING 

|LAND 

i 
1 
i 

i 


1 

'NO-RENT 
LAND 



A B C D E M F 

The horizontal line represents the different grades of 
land, while the vertical lines show their varying produc- 
Expianation tivity. From this diagram we are enabled to see, 
of diagram. not on }y ^ e vai yi n g values of the different classes 
of lands, but also the varying values of different lands 
within the same class. For example, at one end of the 
horizontal base we have land A, the most productive land, 
in the most valuable grade, with a productivity represented 
by AO, of which PO is rent. At the other end we have 
land F, the least productive land in the lowest rent-paying 
belt, with a productivity represented by FJ, of which IJ is 
rent. This land F is the marginal land of the lowest rent- 
paying class and its rent (I J) is marginal rent. A little 



The Theory of Rent 415 

farther up in this grazing land, we find that land M has a 
productivity of ML and that, consequently, it has a differ- 
ential rent of KL above the marginal rent NK. Altogether 
this land M has an economic rent of NL, which represents 
the sum of both the marginal and differential rent. 

So far we have applied the law of rent to only one kind 
of " land," namely, the fields. It is, however, applicable 
to other forms of land, such as mines, forests, n , 

Other 

and water power. For example, the marginal applications 
water power would be the poorest rent-paying 
water power that could be commercially used for a certain 
purpose, as the running of a sawmill. A larger and stronger 
stream, capable of being used for the same purpose, would 
yield a greater return of sawed lumber. This additional 
income secured in this manner would represent the differen- 
tial rent. Were there a source of water power just yielding 
a return large enough to pay for the machinery used in har- 
nessing it and the labor needed in operating it, it would cor- 
respond to " no-rent " land, and might well be called " no- 
rent " water power, In a similar manner, this same fun- 
damental principle of economic rent may be applied to 
mines, forests, and other gifts of nature. 

According to these principles, land takes one great por- 
tion of the wealth of society in the form of rent. In any 
advanced civilization the share of wealth dis- 

., . , 1 1 • t r <• The danger. 

tnbution that goes to land m the form of rent 
is always rising. In young and newly settled countries, 
where natural resources are abundant and unappropriated, 
the amount of wealth that goes to land is correspondingly 
small. However, as population increases and resources 
are utilized, the landlord class, under the system of private 
property, naturally appropriates a larger and larger share 



4i 6 American Economic Life 

of wealth. This higher rent may result from the normal 
increase in land's productivity which is brought about by 
extending the margin of cultivation. However, it is possible 
for the landlord class to divert to themselves, through their 
monopoly power, a still larger portion of the wealth of 
society. In the United States there is little doubt that, 
in the past, this monopoly power has been so exercised, 
and that the landlord has sometimes taken not only what 
the land has earned through its extra productivity, but 
that he has, in addition, through his control of prices, 
taken, as so-called rent, more than the land has earned. 
Should this monopoly of natural resources continue un- 
checked, the land-owning class would appropriate a great 
mass of wealth which the land itself did not actually 
produce. 

QUESTIONS FOR RECITATION 

i. Define rent. Give illustrations of its correct and incorrect 
use. 

2. Show how economics puts "new wine into old bottles." 

3. Name the two forms that rent may take. Give an example 
of each. 

4. How is the land user, when he is not the land owner, affected 
by the payment of rent? Contrast Ireland and France in this 
respect. 

5. Is the "tenant-system" of land tenure in operation in Eng- 
land ? In the United States ? What difference does this make ? 

6. Give illustrations of how rent arises from differences in pro- 
ductivity based (1) on fertility, (2) on location. 

7. What will the rent of any given piece of land depend upon? 

8. Describe, in order of importance, the five grades of rent-pay- 
ing land. 

9. Explain the meaning of "no-rent" land. Is this land capa- 
ble of any productivity? What becomes of its return? Are there 
any such lands in the United States ? 



The Theory of Rent 417 

10. Show how the productivity of rent-paying lands varies. What 
becomes of the extra productivity in each case ? 

11. Show how rent varies in a given belt of land. Illustrate 
from the returns on truck farms. 

12. Define (1) marginal rent; (2) differential rent; (3) eco- 
nomic rent. 

13. Explain the general principle running throughout all rents. 

14. Why are the central residential districts of great cities being 
invaded by business houses ? 

15. Explain fully the entire theory of rent by means of a diagram. 

16. Apply the theory of rent to mines or water power. 

17. Why do rents increase with advancing civilization? What 
effect has this increase upon social income ? 

18. Is productivity or monopoly power the determinant of rent? 
Why? 

19. How may monopoly power affect the payment exacted for 
the use of land ? How may society overcome this danger ? 

PROBLEMS FOR DISCUSSION 

1. With whose name is the theory of rent most closely associated ? 
Discuss his life and work. 

2. What is the relation between the law of diminishing returns 
and the theory of rent ? 

3. Do the governments of other countries own land? Would 
it have been better for the United States to have retained the owner- 
ship of its land than to have given it away ? Why do you think so ? 

4. Why is rent called an "unearned increment"? 

5. How does rent arise? Would rent disappear if land were un- 
limited in amount and of equal value ? Defend your position. 

6. What is meant by "free land"? Is there any such land in 
the United States? If so, why don't we all make use of it? 

7. What would be the effect upon rent if new land were dis- 
covered ? If a railroad opened up a new country ? 

8. Is the "rent" of a down-town New York office rent in the 
economic sense of the term ? Why not ? 

0. Are tenants very likely to make permanent improvements 
upon rented land ? Why do you think so ? 



418 American Economic Life 

10. What is the difference between economic rent and com- 
mercial or contract rent ? 

ii. Can you give examples of a rise of commercial rent? Of a 
decrease ? State the causes in each case. 

12. Is the income yielded by permanent improvements on land 
rent or interest ? Why ? 

13. How has the advent of trolley cars and automobiles affected 
rent? 

14. Do high rents cause high agricultural prices or do high agri- 
cultural prices cause high rents ? Explain your answer. 

15. What case of unearned increment in land values can you cite? 

16. State the advantages and disadvantages of private owner- 
ship in land. 

SUPPLEMENTARY READING 

Carver, T. N. The Distribution of Wealth, Chap. V. 

Clark, J. B. Distribution of Wealth, Chap. XIII. 

George, Henry. Progress and Poverty, Book III, Chap. II. 

Hobson, J. A. The Economics of Distribution, Chap. IV. 

Patten, S. N. Dynamic Economics, pp. 144-147. 

Ricardo, David. Principles of Political Economy, Chap. II. 

Walker, F. A. Land and Its Rent. 



CHAPTER XLI 

The Theory of Wages 

I. Nature of wages 

i . Meaning of wages : 

a. Money wages 

b. Real wages 

2. Necessity of money wages 

3. What wages include 

II. Groups of laborers 

1 . Four main classes : 

a. The leaders 

b. The salaried and prof essional men 

c. The skilled laborers 

d. The unskilled workers 

2. Why non-competing 

III. What determines group wages 

1. Supply and demand 

2. Productive power : 

a. Meaning of productivity 

b. Importance of this principle 

c. Marginal productivity 

3. Monopoly power : 

a. Its meaning and use 

b. How wages vary with it 

4. Why group wages are stable : 

a. The progressive advance 

b. Children move up 

5. The conclusion 

Nature of Wages. — In the distribution of wealth, the 
term wages is used to represent the share of the social 

419 



420 American Economic Life 

income that labor receives for its part in production. 
Wages are therefore the return on labor, just as rent is 
„ . the return on natural resources. Since land and 

Meaning 

of wages: labor were the two original factors of produc- 
Money tion, rent and wages were the original claim- 

ants in the distribution of the early social 
income. We have seen that the development of the capital- 
istic regime introduced another element in production, 
and, therefore, another share in the distribution of the total 
product called interest. Our concern now, however, is 
with wages, — labor's share of the wealth of society. This 
share that labor receives is popularly estimated, like the 
other shares, in terms of money. The value of labor's 
products, just as the value of all other products, is 
measured through the medium of money ; and, when 
the laborer speaks of wages, he therefore thinks of the 
money wages he receives. Mon^y is the accepted form 
in which wages are paid, because money is the universal 
measure of all economic values. 

It must be remembered, however, that money itself 
is only the measure of value. That is, back of money 
there must be some actually created economic 
goods. These goods constitute labor's real 
wages. The term " money wages " is but a symbol and 
merely stands for the goods for which the money may be 
exchanged. In modern society, the laborer could not 
usually live upon the goods he helps to produce, and he is, 
therefore, very glad to receive money wages. But his real 
wages are represented by the purchasing power of his 
money wage. Indeed, if there were no money, there would 
still be wages, because labor would still produce and be 
entitled to a reward for its part in production. In this 



The Theory of Wages 421 

case, wages would be received in the form of actual prod- 
ucts. 

Why is not labor, to-day, paid in the form of actual 
products? Everywhere we find labor not receiving the 
goods it actually produces, but being paid wages Necessit 
in the form of money. Why has it become of money 
necessary for society to adopt this uniform wage wages 
system for the payment of labor? The productive pro- 
cesses of modern society are highly complicated. There 
is no longer a simple, direct relation between labor and 
the materials of production, and, consequently, the laborer 
no longer receives the actual goods he creates. A great 
intermediary class, known as employers, has grown up in 
industrial society. This class owns the tools of produc- 
tion, offers the laborer employment, receives the product, 
and, in exchange, gives him, through a uniform wage sys- 
tem, a certain sum of money called wages. The pay- 
ment of money wages, however, should not obscure the 
real relation between labor and the product it creates. 

Another important consideration to bear in mind in a 
discussion of the nature of wages is the inclusive character 
of the term. Not merely physical laborers re- w - 
ceive wages. Since wages are the reward of labor, wages 
and since labor is industrial effort, the term mcu e 
wages applies to the rewards of industrial activity, whether 
mental or physical. It is, therefore, a great mistake to 
confine the term wages, in our thinking, merely to the re- 
turn on physical labor. Wages is just as broad as labor, 
and we shall find that there are several well-defined groups 
of labor, each one of which receives some form of wages. 
In these upper groups it is sometimes customary to speak 
of the return as salary, fee, or compensation. However, 



422 American Economic Life 

the term wages includes these returns, so that the salaried 
architect or the public official, as well as the office boy or 
the fireman, is the recipient of wages. In fact, in the United 
States perhaps nine-tenths of those gainfully employed 
receive wages, so that our working population may well 
be described as a wage-earning group. 

Groups of Laborers. — Since wages include the incomes 
of so many different laborers, it is necessary to classify 
Four main laborers according to wages received. In the 
classes. £ rst c i ass are ^ i eac [ ers — ^ e men anc j WO men 

of greatest productive capacity. This group includes 
the brain workers of largest wage-earning power, such as 
high salaried executives, authors, and inventors. Next 
to these comes the large body of successful salaried and 
professional men who stand out prominently in every 
community. The recognized physician, lawyer, or educator 
as well as the salaried engineer or expert accountant may 
be included in this group. The next class of laborers 
is made up of the great mass of skilled workers who have 
received some form of special training. Not only carpenters 
and mechanics, but skilled draughtsmen and typists are 
members of this class. Finally, there is the horde of un- 
skilled workers that range all the way from the peddler to 
the immigrant street cleaner. These last two classes merge 
imperceptibly into each other, and the laborers forming 
the connecting link are often spoken of as semiskilled 
workers. 

The division of labor into these groups may be observed 
in almost every community. Professor Giddings has 
Why non- brought out the basic differences in these groups 
competing, ^y characterizing them as (i) the responsible 
mental, (2) the automatic mental, (3) the responsible 



The Theory of Wages 



423 



manual, and (4) the automatic manual. Each group is 
thus well marked off from every other by reason of the 
special quality essential to the success of each class. Hence 
these groups are practically non-competing. In fact it is 
often customary, in certain communities, for the personnel 
of each group to be made up of the same families generation 
after generation. This, of course, is more true of the 
fixed, static societies of the Old 
World than of American civili- 
zation. We shall see presently 
that certain forces are at work in 
new countries to break down these 
rigid class distinctions. But even 
here it is generally true that these 
groups are so well marked off that, 
at any given time, little competi- 
tion prevails among them. It is 
therefore our task to discover now 
what determines wages in each of 
these well-defined groups which may be represented by the 
accompanying diagram. 

What Determines Group Wages. — At the outset it 
will be noticed that these groups of laborers increase in 
size as they go downward from the top to the supply and 
bottom of the pyramid. At the same time it demand - 
must be evident that, from the standpoint of production, 
their capacity decreases in the same direction. This means 
that the supply of labor increases in each lower group, while 
the demand for labor increases with the upward movement 
through the groups. Hence the law of supply and de- 
mand applies to labor, as it does to economic commodities. 
Since wages depend upon the relation between the supply 




424 American Economic Life 

of labor and the demand for it, the wages of group (i), the 
leaders, will be inversely as great as their number is small, 
while the wages of group (4), the unskilled workers, will 
be inversely as small as their number is great. This prin- 
ciple likewise applies to the other groups of laborers. We 
come now, however, to the vital question in the explanation 
of wages. Why should the supply of certain kinds of 
labor be small, and why should the demand for them be 
great? The answer to this question will give us the fun- 
damental reason why wages vary. This is found in the 
principle of productivity. 

It is evident that men of high productive capacity can 

command high wages. This kind of labor is in demand 

because its productive power is great and its 

power: supply is limited. The principle of productivity, 

Meaning of therefore, plays the dominant part in determining 

productivity. , , . 

the wages that such a group of men receives. 
By productivity is meant the creative power which in- 
dividuals possess in varying degrees and whereby they 
are able, either directly or indirectly, to produce material 
wealth. On all sides there are evidences of this kind of 
capacity in workers of the first order. 

Throughout the whole theory of wages, this principle 
of productivity must be constantly kept in mind. In fact, 

it forms the foundation of the general theory of 

Importance \ 

of this distribution. Not only labor, but also capital, 

prmcxp e. depends upon productive power as a basis upon 
which each may claim a share in the distribution of wealth. 
As Professor H. R. Seager points out, " the law which de- 
termines the division of the product between labor and 
capital in competitive industries for a society in a state 
of normal equilibrium is that each receives the share that 



The Theory of Wages 425 

it produces." If labor did not produce anything, it would 
not be entitled to anything. Labor is entitled to wages 
because it has played a vital part in producing wealth. 
Under free competition, wages will, therefore, depend upon 
labor's productivity, which decreases as the groups in- 
crease in size. 

In our discussion of wages it should be remembered that 
labor's share of the product of industry is fixed theoreti- 
cally at the margin of production, or by marginal Marginal 
producers. Wages, like interest, is therefore de- Productivity. 
termined independently of rent. The share of the total 
product that labor receives, as wages, will consequently 
vary with land's marginal productivity. Where this is 
comparatively high, as in fertile, undeveloped lands, labor, 
like capital, will be correspondingly benefited. For this 
reason, wages in the United States have been relatively 
high, because the marginal productivity of its land has been 
great as compared with that of many other countries. In 
other words, the richness of America's natural resources 
on the frontier has been a potent cause of the high wages 
paid to labor in this country. As the richer land is used 
up or appropriated, labor's share of the social income 
naturally declines, unless its supply diminishes or the de- 
mand for labor increases. 

To-day, however, in the absence of a purely competitive 
regime, does labor receive exactly what it produces ? Does 
the principle of productivity, and this principle 

, Monopoly 

alone, determine under present conditions the power: 
wages of labor ? For example, it is obviously Its meaning 
true that men of great productive power com- 
mand large wages, yet it seems equally obvious that men 
sometimes receive more or less wages than is represented 



426 American Economic Life 

by the value of their product. The wages of any class of 
labor seems to depend, not only upon its productive power, 
but also upon its monopoly power. The more monopoly 
power a group has the higher will be its wages. Monopoly 
power has already been defined as some unusual power 
that enables the holder to fix a price other than the com- 
petitive one. It is frequently exercised by the monopolist 
when he controls prices without regard to the laws of com- 
petition. This unusual power may also be exercised in 
behalf of labor, either individually or collectively. Either 
by acquiring some special ability, or by securing power 
through organization, labor may regulate its price and 
command wages without any absolute regard to the actual 
value of its product. In both cases, through an unusual 
control over labor resources, monopoly power, in addition 
to productive power, determines the wages paid to labor. 
This dependence of wages on labor's monopoly power is 
seen when we examine the monopoly power of each class of 
laborers. Society has had frequent evidence of 
vary with the great monopoly power of the leaders, and 
monopoly of its effect n their mcome- At the other 

power. ^ 

extreme, we have the class of unskilled labor 
with minimum wages and little monopoly power, that is, 
no unusual power to control the price of its labor. Be- 
cause of this absence of monopoly power, the cost of sub- 
sistence is practically the determinant of wages for this 
group of laborers. Above them, the skilled laborers are 
much better off, because their monopoly power is increased 
by group organization. The group of salaried and pro- 
fessional men secure monopoly power largely through in- 
dividual reputation and initiative. Thus it may be seen 
that, in all these cases, group wages vary not only with 



The Theory of Wages 427 

productive power, but also with monopoly power. This 
principle determining group wages applies likewise to in- 
dividual wages. 

In a discussion of group wages there is another question 
that naturally arises. Why are group wages more or less 
stable? For example, why does the wage of the why group 
unskilled laborer remain approximately at the ^bie^ 6 
same level over long periods of time? The Progressive 
answer to this question is clear. The progres- advance - 
sive members of one group advance to the next higher, 
thus relieving an undue pressure of numbers in the group 
below. For example, the great influx of immigrants, who 
have joined the ranks of unskilled labor in this country, 
has forced the American unskilled worker to seek some 
special training fitting him for more skilled labor. His 
standard of living will not submit to the low wages that 
foreign labor accepts. Thus the progressive, who move up, 
make way for the newer ones who come in. 

At the same time, the children of skilled and unskilled 
laborers, who are dissatisfied with the economic position 
of their parents, frequently move up to the class of commer- 
cial and professional men. This general advance, children 
therefore, from one group to another, brought move u ^ 
about by the movement of the more progressive and younger 
elements, results in a general mobility of labor whereby 
overcrowding in one group is minimized and the wages of 
the various groups remain more or less stationary. 

From this presentation of the theory of wages, it will be 
observed that two factors — productivity and monopoly 
power — are of prime importance in determining The 
the wages of a given group, or of a particular in- conclusion, 
dividual. If it were not for productivity, there would be 



428 American Economic Life 

no wages, and if it were not for monopoly power, wages 
would not be what they actually are. Under ideal con- 
ditions of pure competition, the productivity principle 
would be sufficient to explain wages in any given case. Each 
individual would receive as wages that which, in competi- 
tion with others, he produced. But when competition is 
checked, as to-day it actually is, the amount of wages that 
a group or individual can command depends almost as much 
upon his monopoly power, that is, his unusual power to 
control the price of labor, as upon his productive power, 
that is, the wealth he actually produces. 

QUESTIONS FOR RECITATION 

1. Define wages. Do you expect to receive wages ? How could 
you live without wages ? 

2. Explain the difference between money wages and real wages. 

3. Show the effect of prices on wages. 

4. Why is it necessary to have a uniform system of wage pay- 
ment? 

5. How broad is the term wages? Why and how is its meaning 
sometimes restricted ? 

6. Describe the four groups of laborers. Illustrate by diagram. 

7. Why do not the main groups of labor compete with one an- 
other? What effect has this situation upon the general question of 
wages ? 

8. How does the principle of supply and demand affect wages? 
Give examples. 

9. What is meant by productivity? What is the relation of this 
principle to group wages ? 

10. What is the "margin of production"? How does this affect 
wages ? 

1 1 . What effect has competition, within a group, upon wages ? Do 
we have such competition nowadays ? Explain and give examples. 

12. What do we mean by "monopoly power" as applied to labor? 
How does it affect the wages of each group ? 



The Theory of Wages 429 

13. Why do the wages of skilled labor often remain at about the 
same level for long periods of time ? 

14. How does the monopoly power of the physician differ from that 
of the carpenter? How does the monopoly power of each affect 
his wages ? 

15. How does the professional ball-player exercise his monopoly 
power ? How does this affect his wages ? 

16. Explain the relative importance of the principles of pro- 
ductivity and monopoly power in the determination of wages (1) when 
competition is free, and (2) when competition is not free. 

PROBLEMS FOR DISCUSSION 

1. Discuss the "wage fund" theory. How is it regarded to- 
day? 

2. What is meant by the "Iron Law of Wages"? 

3. Who was Malthus? What did he teach? 

4. What interest have the rich in an abundance of labor ? 

5. What is meant by the "sweating system"? Give examples. 

6. What is the effect of public education on labor's productivity? 
On wages ? 

7. Speaking generally, does the laborer gain or lose by working 
under conditions of abundance of land and capital ? Why ? 

8. If a factory town is destroyed by fire, will wages through- 
out the country be affected ? State your reasons. 

9. Make a list of the factors affecting the demand for street 
cleaners in Chicago ; a physician in a small town ; a barber. 

10. Would you have to pay a cook in an Alaskan gold-mining 
camp high or low wages ? Why ? 

n. In your own individual case, what do you think will deter- 
mine your wages in after life ? 

12. If we had no money, would we still have wages? Why? 

13. In the nineteenth century, why were wages as a rule higher 
in the United States than in Europe ? 

14. Why did wages rise in America during and immediately 
after the World War? Can wages rise indefinitely? State your 
reasons. 

15. Why are Chinese excluded from the United States? What 



430 American Economic Life 

group of laborers would be most affected by their re-entry into 
American life ? Why ? 

16. Do the following receive wages ? Why? 
(i) A clergyman. (4) A gambler. 

(2) An editor. (5) An unsuccessful inventor. 

(3) A ball-player. (6) A public official. 

SUPPLEMENTARY READING 

Carver, T. N. The Distribution of Wealth, Chap. IV. 
Clark, J. B. The Distribution of Wealth, Chaps. VII, VIII. 
Davidson, J. The Bargain Theory of Wages. 
Fetter, F. A. Principles of Economics, Chaps. XX-XXV. 
Marshall, A. Principles of Economics, Book VI, Chaps. I-V. 
Patten, S. N. The Theory of Prosperity. 
Taussig, F. W. Wages and Capital. 
Thompson, H. M. The Theory of Wages. 



CHAPTER XLII 

The Theory of Interest 

I. Nature of interest 
i . Its meaning : 

a. Definition 

b. Examples 

2. Kinds of loans 

3. Capital and money 

4. Why interest is necessary : 

a. From standpoint of saving 

b. From standpoint of efficiency 

II. The rate of interest 

1 . How determined : 

a. Supply and demand 

b. Valuation of the future 

2. Why it varies 

3. Monopoly power 

III. Source of the interest fund 

1. The socialist's view 

2. The scientific view 

3. The conclusion 

Nature of Interest. — Capital is also a factor in pro- 
duction, and the share assigned to it in the general dis- 
tribution of wealth is called interest. In other Its 
words, interest is the return on capital and is meaning: 
paid to the owner of capital for its part in pro- De fi mHon - 
duction. That is, if an individual permits his wealth to he 
used as capital, or refrains himself from consuming it un- 

431 



432 American Economic Life 

productively, he receives interest for its use. The lender 
may transfer to the borrower the actual goods which the 
latter needs for engaging in production, or the money with 
which the materials and goods may be secured, or the 
credit which constitutes a claim upon the bank, and which 
represents the purchasing power whereby the borrower 
may secure the goods he desires. For this transfer, the 
lender receives a stipulated sum called interest, over and 
above the principal, or the money value of the wealth trans- 
ferred. 

Broadly speaking, the returns on investments constitute 

interest. We must remember, however, that investments, 

in this sense, do not include land or other natural 

Examples. 

resources which receive rent for the part they 
play in production. Then, too, the return on a house or 
building — not the lot upon which it is built — is not rent, 
as ordinarily described ; this return is interest because it 
is paid on invested capital. Similarly, the returns on 
permanent improvements, like canals, are originally in- 
terest ; while the returns on stocks, bonds, mortgages, 
bank deposits, and loans constitute everyday forms of 
interests. 

While loans are usually negotiated for productive pur- 
poses, they may at times be made for purposes of con- 
Kinds of sumption. But to the lender, the loan is always 
loans. productive because it is the means by which he 

secures interest. Loans for production take the form of 
money or credit through which capital goods, such as 
factories, machinery, and equipment, are secured. Their 
purpose is to assist directly in productive enterprise. 
Loans for consumption may be the result of extravagant 
living, or may arise from the necessities of life. They are 



The Theory of Interest 433 

sometimes called personal loans. If we regard houses 
as " consumption goods " and not " capital goods," 
mortgages on such real estate would be considered con- 
sumption loans. Loans may also be classified as short- 
and long-time loans. Short- time loans are loans needed 
by business men and secured through the banks. The 
name " call money " is usually applied to them, and their 
rates of interest fluctuate from day to day according to the 
conditions of the money market. Long-time loans are 
loans secured, for example, on real estate. They may 
also take the form of railroad and government bonds. 
Their rates of interest are much more stable because of 
the length of time for which they are issued. 

It is important to bear in mind that, primarily, the thing 
for which interest is paid is the use of capital, and that 
money or credit merely represents this capital, capital and 
We have seen that capital is a part of wealth mone y- 
used to produce more wealth. Now it is this very fact 
that capital represents goods engaged in production that 
entitles its owner to the payment of interest. Tools, 
buildings, machinery, and other equipment constitute 
products of past industry which are essential to the pro- 
cess of production, and for the use of which interest is 
paid. On the other hand, this fact must not be inter- 
preted to mean that money itself is not at times a capital 
good. On the contrary, we have seen in discussing capital 
that money is very often such a good. The point to 
remember, however, is that money derives its importance 
as a capital good, not from itself, but because it is a medium 
for securing other capital goods. This is also equally true 
of instruments of credit. In fact, we must remember that 
the replacement fund — the fund for replacing worn-out 



434 American Economic Life 

capital — takes the form of money and credit, and thereby 
gives mobility to capital. 

Why is it necessary to pay interest for the use of capital? 
Why is it not sufficient for the borrower to return to the 
Why lender the exact amount of goods or money 

necessary: advanced to him? In other words, what legiti- 
pointof mate reason exists for the payment of interest? 
saving. ^o answer this question it is necessary to review 

the factors entering into the origin of capital. In an 
earlier chapter we have seen that capital results from saving 
or abstaining from present consumption. Now this absti- 
nence involves a sacrifice, and man is loath to make sacrifices 
for nothing. However, if these sacrifices were not made, 
an individual, especially in the less highly developed com- 
munities, would be apt to consume in the present whatever 
was produced, and thus no fund would arise for the creation 
of capital. Therefore, as an inducement for him to save, 
and as a reward for these sacrifices, he is offered more future 
value for his present wealth. Instead of spending a thou- 
sand dollars to-day, he receives an offer of a thousand and 
sixty dollars next year. This surplus of sixty dollars is 
the reward for his sacrifice. If this reward were not made 
— if interest were not paid — saving would not become 
general and capital would become increasingly scarce. 

If we regard capital from the standpoint of efficiency, 

we find that the payment of interest is still necessary. 

, When, in the presence of an already abundant 

From stand- x J 

point of supply of capital, we regard the creation of 
ejfictency. additional capital as resulting from greater 
efficiency in production, and not simply from increased 
saving, we find that interest must be paid, not so much as a 
reward for present sacrifices, but more as a means of 



The Theory of Interest 435 

preserving and increasing the fund of capital. For example, 
the millionaire's capital must be paid interest in order that 
it may be preserved. The spendthrift dissipates the for- 
tune of his ancestors, and young men with large fortunes 
frequently enjoy the reputation of being " good spenders." 
Although in such cases it would be an exaggeration to speak 
of interest as being paid for rewarding sacrifices, it is 
nevertheless evident that it is paid for preserving capital. 
Should this interest not be paid, the supply of capital we 
now have would eventually be destroyed. Therefore, 
whether we regard capital as resulting from saving, or from 
efficiency, the necessity for the payment of interest still 
exists. 

The Rate of Interest. — Having examined the reasons 
why it is necessary to pay interest, we are now in a position 
to consider the factors determining the rate of „ 

How de- 

mterest. The price paid for the use of capital tennined: 
— the rate of interest — depends theoretically Supply and 

, ,. . . demand. 

upon the same set 01 conditions that determines 
price generally, that is, upon the law of supply and demand. 
The rate of interest, therefore, will depend upon the amount 
of capital — not merely money — as compared with the 
demand for it. Of course, the element that gives capital 
its value is its productivity. Because it is productive, 
capital is in demand. But interest is paid for the use of 
capital not only because capital is productive, but also 
because its supply is limited. The rate of interest, there- 
fore, under conditions of free competition, will just be 
sufficient to equalize the supply of capital with the demand 
for it. 

We may also consider this problem of the determination 
of the rate of interest from a psychological point of view. 



43 6 American Economic Life 

We have seen that the accumulation of capital involves 
abstinence and self-sacrifice. Consequently, it is natural 
Valuation of f° r m &n to value the present consumption of 
the future. W ealth more highly than its future enjoyment. 
For example, the present consumption of a thousand 
dollars' worth of wealth means more to an ordinary in- 
dividual than a contemplation of its enjoyment a year 
from now. This is true because the future is so uncertain. 
Dishonesty, accident, fire, or death may intervene to 
prevent his actual enjoyment of this wealth in the future. 
To offset this discount of the future, a premium of sixty 
dollars, let us say, must be offered him in order that he 
may be induced to abstain from the present spending of 
his wealth. This premium is the interest paid him, and 
just offsets his undervaluation of the future. It is his 
reward for waiting, and prevents his squandering his wealth 
in present consumption. If such a premium in the form of 
interest were not offered, few would make present sacrifices, 
wealth would be immediately consumed, and little capital 
would be created. 

Now it must be evident that the rate of interest will 
vary according to the valuation placed upon the future by 
Why it society. In any given community the rate of 

varies. interest will be low or high according as to 

whether men in general put a high or low estimate on future 
values. In older and more civilized countries, because man 
values the future more highly, the rate of interest is lower 
than in younger and less civilized countries where the 
future is greatly discounted. It is likewise apparent that, 
when the community as a whole is thrifty and places a 
high valuation on the future, many people will abstain 
from present consumption and devote a large proportion 



The Theory of Interest 437 

of their wealth to productive purposes. This will cause the 
supply of capital to be plentiful, while the rate of interest 
will be low. On the other hand, when people place a low 
estimate on the future, they will consume freely in the 
present and so reduce the amount of wealth devoted to 
productive enterprises. This situation will cause capital 
to become scarce, while the rate of interest will be high. 
Therefore, when the supply of capital is great as compared 
with the demand for it, the rate of interest will be low; 
and, conversely, when the demand for capital is great 
as compared with its supply, the rate of interest will be 
high. 

So far we have considered the factors determining the 
rate of interest under conditions of free competition. 
The principle of the productivity of capital has Monopoly 
been sufficient to explain the phenomenon of P° wer - 
interest. In fact, this principle forms the basis of the 
whole theory of interest. However, it must not be for- 
gotten that, in everyday life, the capitalist attempts to 
secure the highest possible rate of interest regardless, if 
possible, of the laws of competition. The exaction of 
usury, for example, is an evil as old as society itself, and 
the " money-lender " is still held up to scorn and ridicule. 
In modern societies, we have also the presence of the 
capitalistic monopolist, who is, indeed, much more danger- 
ous to society than his ancient counterpart. We have 
seen that one illegitimate cause of the inequalities of income 
has been attributed to the exercise of monopoly power by 
the capitalist. Through the concentration and control of 
large sums of capital, the monopolist is sometimes enabled 
to secure a larger share of the social income than the 
productivity of his capital warrants. The presence of mo- 



438 American Economic Life 

nopoly, therefore, is one of the disturbing factors some- 
times entering into the problem. 

Source of the Interest Fund. — There remains yet to be 
examined the source of the interest fund. Whence comes 
The social- the fund from which interest is paid ? We have 
ist'sview. j ust seen w fty ft j s ne cessary to pay interest, 
and the factors involved in determining the rate of interest. 
But how does society secure the means with which to pay 
this sum necessary for the use of capital? Does capital 
get it by robbing labor ? If so, labor is exploited by capital, 
and that which should go to the laborer in the form of 
wages the capitalist appropriates as interest. This view 
is apt to be popular with the so-called laboring class. 
They are often willing to believe that the payment of 
interest deprives them of their full wages. Sometimes, too, 
this may actually occur. When large dividends are paid 
on " watered " stock, and when, through monopoly, an 
unfair advantage is taken of labor, there exists the possi- 
bility that so-called interest is paid at the expense of wages. 

As opposed to this socialistic belief, we have the scientific 
view that capital creates its own fund from which interest 
is paid, just as labor produces the wealth from 
scientific which wages is paid. Capital, to-day, plays as 
great and powerful a part in the productive 
process as the other requisites of production. Interest, 
then, may be paid without infringement on the rights of 
labor from the extra fund of wealth that capital has created. 
If a merchant, for example, by making his store more attrac- 
tive, that is, by adding to its capital and appointments, 
increases his business through the efficiency of capital, 
the extra return thus resulting furnishes the fund from 
which interest is paid. Thus, through increased output, 



The Theory of Interest 439 

brought about by increased productivity of capital, in- 
terest is legitimately provided. 

In the United States, the productivity of capital has 
been sufficient to meet the needs of a growing civilization. 
Not only has capital produced its own interest, xhe 
but it has of course also produced its own re- conclusion, 
placement fund. This it has been easily able to do be- 
cause of the newness of the country and the richness of 
its frontier. It must be remembered that interest, like 
wages, is fixed at the no-rent margin of production, and 
that the productivity of capital is reckoned as marginal. 
If this margin is comparatively productive, capital will 
likewise be productive. In the United States capital has 
been more than ordinarily productive at this margin. 
Because of this fact, interest has been higher in this country 
than in Europe. The productivity of capital has also been 
greatly enhanced in the United States through the effect 
of inventions, and through the efficiency of the industrial 
organization brought about by the great American entre- 
preneurs. 

QUESTIONS FOR RECITATION 

1. What is interest? In what three forms may capital be 
loaned ? 

2. What is the most usual method of borrowing capital? Why? 

3. Give several examples of interest in everyday life. 

4. How do consumption and production loans differ? Give 
examples. 

5. What is "call money"? What are mortgages? Govern- 
ment bonds ? Why do rates fluctuate for the first ? 

6. Explain clearly the relation between capital and money. For 
which is interest paid ? 

7. Would people save if interest were not paid? State your 
reasons. How would capital be affected? 



44o American Economic Life 

8. How can the payment of interest be justified in the case of 
capital borrowed from millionaires ? 

0. What determines the rate of interest? Explain the prin- 
ciple. 

10. What bearing has man's valuation of the future upon the rate 
of interest ? 

11. What is the connection between the valuation of the future 
and the law of supply and demand ? 

12. Why is there a higher rate of interest in Mexico than in New 
England? 

13. Why was it necessary for the United States government to 
advance the rate of interest on the different Liberty Loans it "floated " 
during the World War ? 

14. Explain the influence of monopoly power upon the return 
on capital. 

15. What is the socialist's view of the source of interest? 

16. What is the accepted economic doctrine of the source of the 
interest fund? 

17. Why has capital been more than ordinarily productive in the 
United States? 

PROBLEMS FOR DISCUSSION 

1. If private property in capital were abolished, would interest 
be necessary ? 

2. Discuss the importance of the principle of productivity in the 
theory of interest. 

3. Show in detail the services rendered to production by capital. 

4. Can any part of the earnings of a bootblack be called in- 
terest? Why? 

5. When a company declares an unearned dividend, is the stock- 
holder getting interest ? 

6. Can law fix the rate of interest at any desired point? Ex- 
plain your answer. 

7. Why does the rate of interest vary at the same time in differ- 
ent countries? In different businesses? 

8. The savings of the American people average a billion dollars 
a year. What and where are they ? What return do they yield ? 



The Theory of Interest 441 

9. Is interest different from usury? If so, what is the differ- 
ence ? 

10. Why has the rate of return on investments often been ten 
per cent in the West, seven per cent in the Central states, and five 
per cent in New York ? 

11. It is said that interest is paid for capital, not for money. Is 
this true ? State your reasons. 

12. What is the effect on the rate of interest of a rising standard 
of living ? 

13. What effect did the World War have upon the rate of inter- 
est? Why? 

14. State in summary form the theory of interest. 

15. What is meant by marginal productivity of capital? 

16. Why must capital produce its own replacement fund as well 
as interest ? How do corporations manage this problem ? 

SUPPLEMENTARY READING 

Carver, T. N. The Distribution of Wealth, Chap. VI. 

Clark, J. B. The Distribution of Wealth, Chaps. IX, X, XVII- 

XXIII. 
Ely, R. T. Outlines of Economics, pp. 493-524. 
Fetter, F. A. Economics, Vol. I, pp. 235-313. 
Johnson, A. S. Introduction to Economics, pp. 217-231. 
Seager, H. R. Introduction to Economics, Chap. XIV. 
Taussig, F. W. Principles of Economics, Vol. II, pp. 3-43. 



CHAPTER XLIII 

The Theory of Profits 

I. General character of profits 
i . Meaning of profits : 

a. The ordinary meaning 

b. The economic meaning 

2. Nature of managing ability : 

a. Its requisites 

b. The entrepreneur 

3. Nature of profits : 

a. Why the special term is used 

b. Its relation to risks 

II. Lav/ of profits 

1 . Grades of entrepreneurs : 

a. Those of phenomenal power 

b. Those of unusual ability 

c. Those of ordinary capacity 

2. The "no-profit" class 

3 . Degrees of profits : 

a. How they are measured 

b. An example from the diagram 

c. What "no-profit" class receives 

d. The law summarized 

4. The conclusions : 

a. Under free competition 

b. Under a monopoly regime 

General Character of Profits. — We come now to an 
analysis of one of the shares in distribution that, up to 
this point, in order to avoid confusion of thought, we have 
purposely refrained from mentioning. This share is known 

442 



The Theory of Profits 443 

as " profits." Like rent, the word profits, as used in 
economics, has a meaning distinct from that usually 
attributed to it. In ordinary language the term . 

profits is sometimes used to designate the total of profits: 
gains of a man in business, regardless of whether Ordinary 

_ meaning. 

they represent rent, or interest, or wages. For 
example, a small merchant may own his land, his store, and 
contribute his own labor. At the end of a year his total 
gains may amount to one thousand dollars. These he 
may consider as one, and call the whole income profits. 
But, after our discussion of rent, wages, and interest, it 
will readily be seen that this loose phraseology would be 
misleading and unsatisfactory to the economist. 

In economics, the word profits is dissociated from any 
of the other shares in distribution. Instead, therefore, 
of representing a loose union of the other forms Economic 
of income, it stands for a distinct return on a ™ e( ™™g- 
special agency in production. In the above illustration, 
for example, the amount which the small merchant has 
remaining, after he subtracts from his sum total income the 
shares that land, labor, and capital are entitled to, is char- 
acterized by the economist as pure or net profits. It 
represents a surplus of wealth over and above the returns 
on the three factors of production. This extra return is 
due to the superior managing ability of the independent 
business man, and is appropriated by him for that reason. 
Profits, therefore, are the return on managing ability. 

To understand more clearly the character of profits we 
must thoroughly comprehend the nature of managing 
ability. Managing ability implies two things, (1) a special 
kind of labor or ability, and (2) something to manage. 
The basis of this special ability may be inherited and thus 



444 American Economic Life 

form a nucleus for future development. It must, however, 
be developed. Managing ability does not spring, full grown, 
Nature of from the head of the would-be manager. Un- 
abffity- 118 doubtedly it exists, in varying degrees, in the 
jtsreq- inherent natures of different individuals. But 
uisites. to (i eve i p managing ability up to the point 

required by efficient business organization there is re- 
quired great skill, technical knowledge, and an insight 
into human nature that result only from years of experience 
and special training. Skill, judgment, initiative, insight, 
efficiency, — all are required in managing ability. Further- 
more, for the exercise of this ability, there must naturally 
be " something " to manage. Now this something is 
made up of the land, labor, and capital required in pro- 
ductive enterprise. A site must be had for the factory ; 
the building, raw materials, and equipment must be 
provided ; the labor force must be secured. Consequently, 
managing ability represents a united control of these 
factors of production. It is not necessary that the indus- 
trial manager own all the land and capital which he manages, 
although it is perfectly possible for him to be the owner as 
well as the manager. Ordinarily he is intrusted with the 
management of capital contributed by hundreds of stock- 
holders as well as of that furnished by himself. 

In order to individualize the industrial manager still 
more clearly, the term" entrepreneur or enterpriser is 
The applied to him. In a general way, he represents 

entrepreneur. tne independent business man, and manifests all 
degrees of ability. However, we are accustomed to think 
of the entrepreneur as possessing the qualities required in 
the highest forms of industrial enterprise. Here, in addi- 
tion to the characteristics of managing ability already 



The Theory of Profits 445 

mentioned, the entrepreneur is found to be resourceful, 
daring, and even imaginative. Consider, for a moment, 
the qualities required in the great railroad builder, or in 
the organizer of a great steel industry. These men must 
possess not only unusual skill and efficiency, but they must 
be made of such stuff as will remain undaunted in the 
face of seemingly unsurmountable difficulties, unmoved by 
ignorant or unjust criticism, and capable of visualizing 
great dreams of empire. 

Such is the entrepreneur whose reward we term profits. 
While we must always regard profits as the return on 
managing ability, we may view managing ability 
as a kind of labor, and, therefore, consider pro fits: 
profits as a specialized form of wages. This Why the term 
view has sometimes been taken, but it is found 
to be confusing. It is, of course, true that the incomes of 
our great American managers are made up largely of the 
returns on their industrial effort in the form of organizing 
and managing ability. Hence, it might be argued that, 
since managing ability is only another form of labor or 
industrial effort, its return in the form of profits is only 
another form of wages. However, it would be most confus- 
ing to speak of the wages of a fireman and of the wages of 
a railroad organizer. To avoid this confusion of thought, 
we differentiate managing ability from ordinary labor, giv- 
ing it a distinct classification as a separate factor of produc- 
tion, and we apply to its return the special term profits. 

If we are looking for a synonym for managing ability, it 
may better be found in the phrase " risk-taking." In fact, 
risk-taking is almost synonymous with business R e i a ti on 
enterprise, which is the peculiar field of the t0 nsks - 
entrepreneur. The independent business man, i.e. the 



446 American Economic Life 

entrepreneur, is constantly taking risks. This element is 
eliminated from rent, and wages, and interest ; but it is a 
most potent factor in the activities of enterprisers. The 
enterpriser himself contracts to pay definite sums for his 
building site, his factory, and his labor force. No element 
of risk enters into the returns on these factors. They 
must be paid. It is only the return to the entrepreneur 
that involves the element of risk. If he has had a successful 
year, his returns, over and above the stipulated sums he 
has contracted to pay for rent, interest, and wages, will be 
large and his profits great. If he has had a disastrous year, 
his losses, unless covered by specific insurance, will be great. 
In either case, when he assumes the risk, he accepts the con- 
sequence of success or failure. In this sense, therefore, 
profits may be said to be the reward for risk-taking. 

Law of Profits. — We are now ready to consider the 
question of how profits are determined. Why should the 

profits of one industrial manager differ from the 
entrepre- profits of another? To answer this question 

we must first examine differences in managing 
ability upon which these profits depend. While managing 
ability is of multitudinous kinds and degrees, entrepreneurs 
may, in general, be conveniently grouped into three or four 
classes. At the head of the group of industrial managers 
are those who possess phenomenal managing ability. They 
stand out in bold relief against the background of normal 
power in industrial management. Had a man of this 
phenomenal power in business a corresponding ability 
in art or literature, he would become as famous as Michael 
Angelo or Shakespeare. He is the genius in all kinds of 
business enterprise. It is needless to say that the number 
of men in this class is extremely limited. Next to the men of 



The Theory of Profits 447 

phenomenal power come those of unusual managing ability. 
They are men of talent, but just fall short of possessing 
industrial genius. They comprise the second group of 
foremost industrial organizers and leading merchants and 
manufacturers in the country. Next to these come the 
men of ordinary capacity in industrial management. They 
are successful and independent business men, well known 
in their respective communities. The number of men in 
this class is quite large. 

Finally, in the general group of entrepreneurs, come the 
men of minimum managing ability. They are on the 
margin of business enterprise and, as entre- "No-profit" 
preneurs, they make no more profits than, as class - 
laborers, they would command wages. Consequently they 
hover about the margin of business independence, — 
sometimes venturing out for themselves, and, again, seek- 
ing employment under cover of some one's management. 
Under these conditions, therefore, they may be said to pos- 
sess only marginal ability. The term " wages of manage- 
ment " is used to distinguish their return from that of the 
more successful entrepreneurs, for whose return the term 
profits is reserved. Hence, it is often customary to speak 
of entrepreneurs of marginal ability as the " no-profit " 
class of entrepreneurs. 

The different grades of managing ability, and the profits 
they respectively command, may be represented by a 
diagram with the principle of which we are already familiar. 
From this diagram it will be seen that the principle which 
determines degrees of profits is similar to that determining 
differences in rent. Just as we have different Degrees of 
grades of land with varying productivity, so we P rofits - 
have different classes of entrepreneurs with varying 



44^ 



American Economic Life 



capacity. As we measure rents on the basis of the return 
on " no-rent " land, so we measure profits on the basis of 
the return on the " no-profit " class of entrepreneurs. 
For example, the man D, in the diagram, has a return on 
his effort represented by the line DE. Of this return DE, 
LE represents profits and is known, in economics, as 
marginal profits. The man A, however, has a much larger 
return, represented by AH, of which IH is profits. In both 



^^v! 


PROFITS ^ N *^^ 






^ ^J 




j 

GENIUS 


K 

UNUSUAL POWER 


L 
ORDINARY CAPACITY 


MARGINAL ABILITY 



cases the return of these men on their managing ability, 
that is, their profits, has been measured by using the return 
of the " no-profit " class with marginal ability as a common 
basis of comparison. It will be seen, therefore, that these 
men of marginal ability, used to represent the " no-profit " 
class of managers, serve the same purpose as the " no-rent " 
land in the theory of rent. It must be remembered, how- 
ever, that this " no-profit " class, just like the " no-rent " 
land, has some return for its effort ; but this return is 
called " wages of management " to distinguish it from pure 



The Theory of Profits 449 

profits. Therefore, the law of profits may be thus sum- 
marized ; the profits of any given entrepreneur will be the 
difference between his return and the return of the " no- 
profit " class of entrepreneurs. 

In the manner of their determination profits, then, 
resemble rent. Both are differentials based on marginal 
cost of production. Therefore, under condi- 
tions of free competition, neither determines conclusions: 
prices, because prices are fixed on the margin of Under free 
production by marginal producers. Under the 
competitive system, pure profits cannot affect prices be- 
cause, as we have seen, marginal producers receive no such 
profits, but obtain merely wages of management for their 
labor and current rates of interest for their capital. Prices 
are therefore fixed, theoretically, at the point where true 
profits do not exist. The successful entrepreneur's pure 
profits depend upon his superior efficiency and the superior- 
ity of his managing ability over that of marginal producers, 
or the no-profit class of entrepreneurs. When competition 
is freely at work throughout society, profits are a surplus 
of wealth secured by superior managing ability in the pro- 
duction of a commodity at a cost lower than that repre- 
sented by the price charged at the margin of production. 
The superior entrepreneur secures profits when he sells 
goods at prices representing marginal cost of production. 

Now all of this is true when we deal with ideal conditions 
of pure competition. When, however, we consider a 
society in which monopoly power — price-fixing Undgf a 
power — is known to exist, we have to reckon monopoly 
with an entirely different set of conditions. regtme ' 
With the introduction of the element of monopoly, prices 
are no longer, as a matter of fact, determined simply at 



450 American Economic Life 

the margin of production. In a monopoly regime, the 
importance of marginal producers in fixing price is of less 
significance than the monopoly power of the great entre- 
preneurs, who often fix monopoly prices without any regard 
to the marginal cost of production, at the highest point 
consistent with the greatest monopoly gain. Monopoly 
profits are therefore entirely different from competitive 
profits. In discussing " Price and Monopoly," under 
Problems of Exchange, we have made frequent references 
to the effect of monopoly power on prices, that is, to mo- 
nopoly profits. Should this monopoly power increase, and 
should prices continue to be forced above a competitive 
level, much of our social income may be converted into 
the profits of the entrepreneur. Uncontrolled monopoly 
power is distinctly antagonistic to social welfare, and 
society must learn to protect itself against this social 
menace. 

QUESTIONS FOR RECITATION 

i. How is the term profits popularly misused? 

2. Distinguish economic profits from the other shares in dis- 
tribution. Give examples. 

3. Why is profits regarded as a distinct share in distribution? 

4. Why is profits a surplus ? 

5. Name some of the characteristics of the entrepreneur. How 
are these secured? Name half a dozen great entrepreneurs. 

6. Does the entrepreneur own the land or capital which he 
manages ? Explain your answer. 

7. Why are not profits considered as identical with wages? 

8. If there were no risks, would there still be profits? Explain 
the relation between the two. 

9. Why do profits vary ? Give some illustrations. 

10. Describe the different grades of successful entrepreneurs, 
n. Explain the meaning of the " no-profit" class. What does 
this class receive ? 



The Theory of Profits 451 

12. Draw a diagram, and explain from it the theory of profits. 

13. How do we measure differences in profits? Why do we speak 
of profits as a differential? 

14. Summarize the law of profits. 

15. Under free competition, do profits affect prices, or do prices 
affect profits ? Why ? 

16. How is the theory of profits upset by the growth of monopoly 
power ? 

17. How may society control monopoly profits ? Why is this not 
done? 

18. What is meant by "profiteering"? Could the high prices of 
the World War period be properly accounted for on this basis alone ? 
Give reasons. 

PROBLEMS FOR DISCUSSION 

1. What are the chief elements in business enterprise? 

2. Do unsuccessful employers pay less wages than those who 
make larger profits ? State your reason. 

3. What is the effect of competition on profits? Of monopoly 
power ? 

4. What devices do entrepreneurs sometimes employ to escape 
competition ? What are the social effects ? 

5. What do you think has been the basis of most of the more 
recently acquired large fortunes in this country? Give some exam- 
pies. 

6. The syndicate which underwrote the securities of the U. S. 
Steel Corporation is said to have made over $40,000,000. Was that 
profit ? Do you think it was earned ? 

7. Are the profits of a business man a good measure of his serv- 
ice to society in the production of wealth? Defend your position. 

8. Do profits tend to an equilibrium as between different indi- 
viduals? Different occupations ? Different places? 

9. Is a restriction of profits ever justifiable ? Why or why not ? 

10. What are the arguments for and against an excess-profits 
tax? 

11. Describe the various means society may employ to distribute 
profits more generally throughout the community. 



452 American Economic Life 

12. Name some field of production where the returns are in the 
form of profits. 

13. If the marginal producer receives no real profits, why does he 
continue in business ? 

14. Do profits resemble any other share in distribution? Why? 

15. Is the entrepreneur entitled to a great fortune ? Why? 

16. What is the difference between gross profits and net or pure 
profits ? 

17. In your opinion, have any great fortunes ever been made 
through monopoly profits unfairly secured ? 

18. Apply, as a remedy, the inheritance tax to the above prob- 
lem. 

19. How is private monopoly different from public monopoly? 

SUPPLEMENTARY READING 

Carver, T. N. The Distribution of Wealth, Chap. VII. 
Clark, J. B. The Distribution of Wealth, Chap. VI. 
Ely, R. T. Monopolies and Trusts, Chap. III. 
Ely, R. T. Outlines of Economics, Chap. XXV. 
Haynes, J. Risk as an Economic Factor: Quarterly Journal of Eco- 
nomics, Vol. IX. 
Meade, E. S. Trust Finance. 
Veblen, T. Theory of Business Enterprise, Chap. III. 



CHAPTER XLIV 
The Outlook for Labor 

I. Labor's monopoly power 

i . Individual monopoly power : 

a. Acquired capacity 

b. Inherited capacity 

2. Group monopoly power : - 

a. Meaning and example 

b. Where and how exercised 

3. The outlook in the United States 

II. Labor's power of substitution 

1 . From standpoint of consumption : 

a. Meaning and examples 

b. The consequence 

2. From the standpoint of production : 

a. Meaning of mobility of labor 

b. Examples of this mobility 

3. Double effect of this power on labor : 

a. As producer 

b. As consumer 

III. Relative rates of increase of the factors of production 

1. Importance of rate of increase 

2. Conditions in United States : 

a. Before the World War 

b. After the World War 

3. General conclusion 

In concluding a discussion of the theory of distribution, 
it is important to understand the probability of the differ- 
ent shares of wealth increasing or diminishing. From the 

453 



454 American Economic Life 

standpoint of social welfare, the future of labor is espe- 
cially significant, because the great mass of people depend 
altogether upon wages for their support and material 
happiness. In determining what chance labor has of in- 
creasing its share in the general distribution of social in- 
come, it will be found that, aside from the principle of 
productivity, much will depend, (i) upon the growth of 
labor's monopoly power, (2) upon the exercise of its power 
of substitution, and (3) upon its rate of increase as com- 
pared with that of the other factors of production. 

Labor's Monopoly" Power. — In the lowest group of 
laborers we have seen that there exists comparatively 
Individual ^tle monopoly power, and that competition, 
monopoly therefore, fixes the wage almost at the minimum 
of subsistence. In all the other groups, however, 
monopoly power plays a considerable part in determining 
the upper limit of wages. This monopoly power of labor 
may be exercised either individually or collectively. The 
individual may possess this unusual control over the price 
of his labor either as a result of special training, or by 
reason of some inherited tendency that has been devel- 
oped and cultivated. For example, the man who has made 
a technical study of the textile business at home and 
abroad, who has a thorough grasp of business detail and 
knows how to manage large numbers of men, possesses 
by reason of his training a great monopoly power. This 
power enables him to command a salary of perhaps twenty- 
five thousand dollars a year. In a similar manner the 
man who, through inherited ability and later training, is 
able to draw striking cartoons and caricatures enjoys such 
a great monopoly power that he may be able to command 
a salary of twenty thousand dollars a year. The monopoly 



The Outlook for Labor 455 

power of the cartoonist was originally inherited, while that 
of the manager was subsequently acquired ; in both cases, 
however, it was individual. 

Group monopoly power, on the other hand, is of quite a 
different character. In this case labor relies for its con- 
trol over wages, not on great individual power, Grou 
but on collective action. Group monopoly is the monopoly 
power whereby a group, through organization, power - 
is able to control the price of labor and to regulate its own 
wages. For example, suppose a number of carpenters are 
working for ninety cents an hour; and suppose further 
that there are no other carpenters near by, and that there 
is plenty of construction work in the neighborhood. It 
occurs to these men that if they unite together and demand 
$1.10 an hour they will be able to increase their wages. 
This they do and, by their organization, create a monopoly 
power which enables them to secure the additional wage 
demanded. Among skilled laborers the monopoly power 
of organization is everywhere in evidence, and competi- 
tion plays a secondary part in determining wages. This 
monopoly power may be exercised not only through the 
union and strike method, but also through minimum 
wage laws such as exist in Australia and New Zealand. 

In America, there are many evidences of the monopoly 
power of labor. From the standpoint of individual monop- 
oly, the emphasis on industrial education and spe- 

. , ... , P , . n . . ' , Theout- 

cial training is a most hopeful indication for the look in 
future of labor. Everywhere the necessity for g t m t *^ 
increased efficiency is being pointed out and the 
means of securing it provided. At the same time, the 
monopoly of organization is becoming more and more 
powerful. Men are beginning to realize how much more 



456 American Economic Life 

can be accomplished by collective bargaining than by 
individual action. Thus, through the increase both of 
individual and group monopoly, labor possesses a means 
of enlarging its share of the social income. 

Labor's Power of Substitution. — Another advantage 

that labor enjoys is found in the exercise of its power of 

substitution. This power is simply the ability of 

standpoint labor to substitute one good for another, or one 

of con T employer for another. For example, when the 

sumption. r j r- 7 

price of oil becomes too high, gas or electricity 
may be substituted. If the price of soap is raised, a 
washing powder may be used. When meat rises to a pro- 
hibitive figure, some other form of proteid diet may take 
its place. In this manner, by substituting one product 
for another, the consumer escapes the extortion of the 
monopolist, and labor, by forcing prices down, gets the 
benefit of income that would otherwise go to the monopo- 
list in the form of monopoly profits. Labor's real wages 
are increased. 

Again, by reason of its mobility and monopoly power, 
labor may substitute one employer for another. By 

mobility of labor is meant the freedom with 
standpoint which labor moves from one place to another, 
of pro- an( j f rom on e employer to another. In the days 

duction. x 

of feudalism, the serf was attached to the soil 
and was prevented from moving from place to place. The 
peasant was born an agricultural worker on a great estate, 
and there he was obliged to live and die. To-day, how- 
ever, in the United States, a laborer moves easily from 
place to place, from employer to employer, and even from 
one occupation to another. If he is dissatisfied with condi- 
tions in one city or under one employer, he seeks employ- 



The Outlook for Labor 457 

ment in a new locality, or under new leadership, where 
the returns or conditions are more to his liking. 

An advancing standard of living always impels labor to 
seek that industry or locality where it will receive its great- 
est reward. The labor union, through its mo- 
nopoly power of organization, makes secure this e ff ect f 
higher standard of living when it is once at- ^ s la p b °^ er 
tained. This mobility of labor naturally re- 
sults in more or less uniformity of wages within the same 
general group of laborers ; but, nevertheless, there is just 
enough difference in real wages to cause labor to sub- 
stitute one employer for another. This power of sub- 
stitution may be used against the employer and in favor 
of labor because, by reason of the growth of labor organiza- 
tion, the employer himself cannot substitute, as freely as 
in former days, one laborer for another. As producer, there- 
fore, labor may use the power of substitution, in conjunction 
with its monopoly power, to fix its own wages ; while, as 
consumer, labor may use this same power to increase its 
income by preventing the entrepreneur from fixing prices at 
the monopoly point in order to swell his own profits. 

Relative Rates of Increase of the Factors of Produc- 
tion. — Still another element favorable to the increase of 
wages is found in the relatively slow rate at which Importance 
labor may increase, when compared with the of rate of 
other factors of production. In order that the 
wages of labor may increase, the relative value of its share 
in the general distribution of wealth must, of course, become 
greater. Now, the value of the share of any factor of pro- 
duction, — whether land, labor, or capital, — depends, 
so far as these factors alone are concerned, upon its rate 
of increase as compared with that of the other factors of 



458 American Economic Life 

production. Scarcity plays an important part in deter- 
mining the value of labor, just as it does in determining 
the value of gold or silver. If gold, for example, is scarce, 
its value will be great, while, if plentiful, its value will 
decrease. Just so it is with labor. If labor increases at a 
relatively slow rate, its value as measured in wages will 
be great, while if its rate of increase is relatively rapid, 
its value will decrease. 

Now in the United States, during the past century, 
there were certain tendencies observable in the relative 
Conditions rates of increase of land, labor, and capital. Dur- 
statef- 6 * * n S ^ at P er i°d capital increased so enormously 
Before the that the rate of interest steadily declined. 
World War. Through the opening up of new lands and the 
wonderful improvements in agriculture, land likewise 
yielded a greater and greater return. However, labor, the 
remaining factor of production, increased at a rate which 
appeared relatively slow when compared with capital's 
rate of increase, or land's rate of increase. Evidence of this 
slow rate of increase was frequently found in utterances 
against " race suicide." In fact, only through immigra- 
tion was the gradual decline in the birth rate offset. There- 
fore, if during that period labor's rate of increase was 
slower than that of capital or land, it was possible, in the 
absence of exploitation, for labor's share of the social in- 
come to increase at a proportionally greater rate than that 
of the other factors of production. 

What influence had the World War upon these relative 
rates of increase of the productive factors? Confining 
After the our attention solely to America, and dealing 
World War. on jy w ^ the obvious facts of warfare, it seems 
evident that its reaction was not relatively unfavorable 



The Outlook for Labor 459 

to labor. Needless to say, the great conflict struck at all 
three factors of production. Natural resources were 
recklessly appropriated, capital was destroyed in spite of 
the increase in money and bank savings, and labor was 
diverted from productive to destructive channels. It is 
safe to say, therefore, that the returns on all three factors 
were unusually affected during this period. This fact is 
equally discernible when applied to the returns on capital 
and labor. In floating United States Government Bonds, 
for example, the rate of interest had to be steadily ad- 
vanced, and, in the employment of labor, higher wages 
had to be constantly offered. While it is too early at 
present to obtain a proper perspective of the general 
problem of the comparative rates of increase of all three 
factors since the close of the World War, labor does not 
appear to have been affected in a relatively unfavorable 
manner so far as its distributive share is concerned. 

Briefly stated, the problem of distribution may be thus 
summarized: Rent is paid to the landlord because of his 
control over natural resources. Interest goes General 
to the capitalist in return for the use of capital c <> ncl usion. 
in industry. Profits are paid to the entrepreneur because 
of his managing ability and the risks he undertakes. 
Wages, finally, are paid to the laborer in return for in- 
dustrial effort and in proportion to his productive and 
monopoly power. But, while all these shares are thus 
divided up in theory, they are not always so separately 
distributed in practice. One individual, by represent- 
ing several factors of production, may receive several 
shares in distribution, while another individual may re- 
ceive but one share. In America, this may be slowly 
taking place. Broadly speaking, the laborer usually re- 



460 American Economic Life 

ceives only one of these shares — wages — while the 
entrepreneur frequently takes the rest. As American 
society evolves, the landlord controlling natural resources, 
the factory owner controlling capital, the entrepreneur 
taking risks, and the monopolist controlling prices, all 
tend to become the same person. Through large scale 
production, one business interest may control all the im- 
portant processes of industry from the raw to the finished 
product, and, through its united control over land and 
capital, may take into one treasury the different incomes 
from several distributive channels. 

QUESTIONS FOR RECITATION 

1. Define monopoly power as applied to labor. Give examples. 

2. Distinguish between individual and group monopoly power. 
Which is more prevalent ? Why ? 

3. Under a regime of pure competition, would monopoly power 
develop ? Prove your position. 

4. How is individual monopoly power acquired ? Group monop- 
oly power ? In what group or groups of labor is each chiefly found ? 
Why? 

5. Do you think labor is or is not developing too much monopoly 
power at the present time ? Why? 

6. Has labor more monopoly power in England or in the United 
States ? Why do you think so ? 

7. Why are men in the public service discouraged or prevented 
from exercising group monopoly power? Do you agree with this 
point of view ? 

8. Define labor's "power of substitution." How may this be 
used to labor's advantage, (1) from the standpoint of production, 
(2) from the standpoint of consumption ? 

9. Why cannot the employer use this power as effectively as the 
laborer ? 

10. From the standpoint of consumption, what did the World 
War teach the American people with regard to the power of sub- 
stitution? 



The Outlook for Labor 461 

11. Why is the power of substitution a two-edge sword in the 
hands of labor ? 

12. What connection is there between a factor's rate of increase 
and its return ? 

13. When the rates of increase of the three factors vary, which 
one will derive the greatest relative advantage — the one with the 
slowest or fastest rate of increase ? Why ? 

14. At the close of the nineteenth century, how had the three 
factors relatively increased ? What was the effect of this upon labor? 

1 5. Has interest or wages recently advanced more rapidly ? Why ? 

16. Give a brief summary of the general theory of distribution. 

PROBLEMS FOR DISCUSSION 

1. What reasons can you offer to explain why the wages of women 
are generally lower than the wages of men ? Is this justifiable ? 

2. What conditions fix the maximum limit to the rate of wages 
in a particular case ? 

3. Is there any connection between the American rate of wages 
and American inventions ? 

4. By what methods is labor increasing its monopoly power? 

5. Name the factors in modern society which increase the mo- 
bility of labor. Discuss their relative importance. 

6. What effect should the increased mobility of labor have on 
wages in different sections of the same country ? Why ? 

7. Ordinarily an increased demand for a commodity which is 
not absolutely limited in amount will result in an increased supply. 
To what extent would this be true of laborers ? Of labor ? 

8. Cite cases of monopolistic limitation of labor. 

9. Explain the operation of the power of substitution. 

10. What factors limit the power of the entrepreneur over labor ? 

11. How may labor force prices down through the exercise of the 
power of substitution ? 

12. How does an advancing standard of living affect wages ? By 
what means is this accomplished? 

13. Was the condition of labor in America in the nineteenth cen- 
tury better or worse than its condition in the eighteenth century? 
Why? 



462 American Economic Life 

14. What promise has the twentieth century for labor? Why? 

15. What did Henry George emphasize as the cause of poverty? 
Do you think his diagnosis was correct ? Does rent affect wages ? 

16. Has the entrepreneur's return increased much in the last half 
century? Has this affected wages ? Give your reasons. 

17. Point out the consequences of the World War upon labor and 
wages. 

SUPPLEMENTARY READING 

Carlton, F. T. The History and Problems of Organized Labor. 
Commons, J. R. Trade Unionism and Labor Problems. 
Ely, R. T. The Labor Movement in America. 
Mitchell, J. Organized Labor. 
Patten, S. N. Theory of Prosperity. 
Patten, S. N. Dynamic Economics. 



PART SIX 
PROBLEMS OF ECONOMIC REFORM 

CHAPTER XLV 

Experimental Programs 

I. Profit sharing 
i. Its meaning 

2. Its different forms 

3. Its American status : 

a. Some examples 

b. The difficulties : 

(1) Mobility of labor 

(2) Number of unskilled workers 

(3) Financial stress 

4. The outlook 

II. Welfare work 

1. Its meaning 

2. An example 

3. Recent improvements : 

a. In factories 

b. In stores and railways 

4. Its future 

III. Cooperation 

1 . Its usual forms : 

a. Cooperative banking 

b. Cooperative consumption : 

(1) Its English origin 

(2) Its American development 

(3) Its advantages 

463 



464 American Economic Life 

(4) Its difficulties 
c. Cooperative production 
2. Outlook for cooperation 

A study of American economic life would not be com- 
plete without a discussion of the leading economic experi- 
ments and programs that have, as their common purpose, 
the improvement and betterment of the life of the individual 
and of the community. Some of these are more experi- 
mental than fundamental in character. The experimental 
programs may be grouped under the head of profit sharing, 
welfare work, and cooperation. 

Profit Sharing. — This attempt to improve the con- 
dition of the worker originates with the employer, either 
Its from a sense of social justice, or because he be- 

meaning. Heves he will himself be the ultimate gainer by 
this policy. The system of profit sharing guarantees the 
worker, in addition to regular wages, a specified share of 
the profits of the business. In other words, it presupposes 
the payment of wages, and then shares the net profits 
with the workers in a certain predetermined proportion, — 
the employer voluntarily giving up part of his profits in 
order that the laborers Under him may participate in their 
enjoyment. The simplicity of profit sharing is greatly 
in its favor. 

Profit sharing usually takes one of the three following 
forms: (1) the employee participates in the ownership 
its different of the stock ; (2) the employee (chiefly in Eng- 
forms. • i anc [ an( j m j-^g United States) is given extra 
compensation in proportion to his wages and year's labor ; 
(3) the employee enjoys a system of deferred participa- 
tion in profits. Under this last-named system, each year 
a percentage of the profits is credited either to the entire 



Experimental Programs 465 

body of employees, or to specific employees. In cases 
where the percentage of profits is credited to employees 
as a unit, profit sharing takes the form of a provident 
fund. In order to share in this fund, the employee must 
be sick, injured, or in some other condition of need. In 
cases where profits are credited to employees individually, 
each receives his share either when he attains a specified 
age, or when he has remained a certain time in the estab- 
lishment, or when he suffers an unusual economic pressure 
from sickness or accident. This system, extensively em- 
ployed in France, has received little encouragement in Eng- 
lish-speaking countries. 

In the United States, profit sharing may be said to be 
in its infancy. In the last quarter of the nineteenth cen- 
tury, various experiments in this field were begun 
by the A. S. Cameron Company of Jersey City; can status: 
by the Brewster Carriage Company of New Some 

tr 1 -i it^ -iT-n/r r • *->« examples. 

York; by the Peacedale Manufacturing Com- 
pany ; and by the N. O. Nelson Company engaged in the 
manufacture of plumbing goods. On the whole, these 
early experiments were on a comparatively small scale, 
and not altogether successful. Later much more progress 
was made in this direction by many other corporations, 
among which may be mentioned the Stetson Company of 
Philadelphia, hat manufacturers, the American Rolling 
Mill Company of Middletown, Ohio, manufacturers of 
sheet metal, and the United States Steel Corporation. 
However, it was the Ford Motor Company of Detroit 
that gave this movement its greatest impetus. As early 
as 1 914, this company announced its intention of distrib- 
uting $10,000,000 annually among the workmen and em- 
ployees of the establishment in addition to their regu- 



466 American Economic Life 

lar wages. If this example should be followed by other 
great manufacturers, and profit sharing should be generally 
conducted on such an extensive scale, the success of this 
method of sharing profits would be instantaneous. 

However, the other forms of profit sharing are not so 
simple in their method of application. Especially do 
The diffi- they present certain difficulties when applied 
cuities. -j- American workers. To begin with, from an 

American standpoint, the system of sharing profits, through 
deferred payments, has an obvious disadvantage. It 
implies that a given employee will remain under an em- 
ployer for a long period of time. In America, we have 
seen that this is frequently not the case. Labor is mobile, 
moving from place to place and from employer to employer. 
This mobility of labor is one of the means employed for 
its betterment. Seldom do wageworkers remain twenty 
years under one employer. A system of deferred payments, 
however, works on the principle that men will devote 
nearly their whole lives to one employer. 

Again, this system works best in trades where work- 
men are highly skilled and intelligent. In the average 
American industry a common labor group is coming more 
and more rapidly to the front. This group works with 
its hands and neglects its head. The deferred payment 
system would not appeal strongly to its members. At 
best, business is uncertain; and the average employee 
does not relish the idea of working on the deferred pay- 
ment plan for a firm which may become insolvent at any 
time and in this manner deprive him of the chance to share 
in the fund of profits. 

The system, sometimes in vogue, of sharing profits with 
employees by requiring them to be owners of the com- 



Experimental Programs 467 

pany's stock before they are allowed to shar& in the profits 
has a serious financial drawback. This plan is well-nigh 
out of the question for the lower grade of wageworker 
who has a family dependent on him. He needs all his 
income to maintain a decent standard of living, without 
investing part of it in the company's stock. If, however, 
he does succeed in participating in stock benefits, his in- 
terest will naturally be centered in that particular busi- 
ness so that his freedom of action is curtailed. In fact, 
this particular feature of profit sharing is rather pater- 
nalistic and opposed to the freedom and mobility of Ameri- 
can labor. 

Nevertheless, profit sharing, when applied to the worker 
in the most direct manner, is capable of producing ex- 
cellent results. So long as the wage system con- _ 

° 1 The outlook. 

tinues, profit sharing may be utilized to remedy 
many of the inequalities of social income. In fact, this 
method may become generally employed by the great 
entrepreneur to establish a true partnership of labor and 
capital in business. By this means, capital secures an 
added interest in the business on the part of the worker; 
while labor receives a larger share of remuneration for 
services rendered. When profit sharing is conducted on 
this principle, it means higher efficiency, greater loyalty 
for the employer; and keener interest, higher income for 
the worker. Such a combination is sure to be beneficial 
to production. 

Welfare Work. — Another economic experiment, much 
less fundamental though far more common than profit 
sharing, is welfare work. This is defined by Pro- i ts 
fessor John R. Commons as " all of those services meanm s- 
which an employer may render to his work people over 



468 American Economic Life 

and above the payment of wages." Employers have al- 
ways done some welfare work, but until recently such 
efforts were practically unknown to the general public. 

With the advent of the National Cash Register Company, 

however, and its attempts to provide abundantly for the 

outside wants of its employees, attention was 

An example. * 

widely attracted to the good results of welfare 
work. This company, employing many skilled and highly 
efficient men and women in the manufacture of a very 
complicated machine, decided that it would be advisable to 
adopt every means to develop their interest in the com- 
pany and to make them more efficient workers. In order 
to carry out this design, sanitation was bettered and fac- 
tory conditions improved in many directions. 

Within the past few years, factory construction has 
been revolutionized. The old style factory was a build- 
ing. The new style factory is a factory, planned 
provements: to serve that definite purpose. When the old 
In . factories were built, men wanted a building in 

factories. 

which their employees could congregate and 
work. The progressive modern manufacturer builds a 
structure calculated to fit the peculiar needs of his busi- 
ness, and, in addition, makes every provision for the health 
and safety of his employees. In pursuance of this idea, 
he provides sanitary and comfortable buildings, educa- 
tional institutions, religious centers, insurance funds, co- 
operative stores, and means of recreation after factory 
hours. 

The factory does not furnish the only instance of wel- 
fare work. The modern department store is establish- 
ing restrooms and improved lavatories and providing 
schools, reading clubs, military organizations, singing 



Experimental Programs 469 

societies, and many other forms of social gathering for 

the benefit of the employees. The railroads, too, have 

done much good by providing " bunk " houses „ 

• , , ■ In stores 

for employees, when they are at the end of and raii- 

" runs " and away from home. The men under ways ' 
such circumstances often have no convenient place to 
go. The railroad, by furnishing sleeping rooms, amuse- 
ment rooms, books, and other attractions, provides for the 
material comfort and welfare of its employees. 

Undoubtedly the greater part of welfare work is con- 
ducted for purely business reasons. Employers have 
found that it pays. Some concerns, however, 
which enjoy very great financial advantages, Itsfuture - 
are able to carry on welfare work among their employees 
with a more general end in view. The United States Steel 
Corporation, for example, spends nearly $6,000,000 annually 
on this kind of welfare work. But, for the great majority 
of employers, this is impossible. The feeling in favor 
of welfare work is undoubtedly spreading, and, what- 
ever one may think of the objects underlying its establish- 
ment, its results are certainly advantageous to both parties. 
Like profit sharing, welfare work depends upon the em- 
ployer for its initiation and success. But unlike profit 
sharing, welfare work has taken a strong general hold on 
American business men, and constitutes one of the mod- 
ern divisions of every great industrial undertaking. Its 
success rests primarily upon the fact that it is regarded, 
not as philanthropy, but as a means of increasing indus- 
trial efficiency. 

Cooperation. — Under this head are included certain 
efforts which the worker himself has made to improve 
his own condition. The American's spirit of independence 



470 American Economic Life 

has manifested itself in initiating various experiments 
for his own betterment, without depending merely upon 
its usual help received from the employer or from the 
forms: public. One attempt in this direction has 

been in the form of cooperation. From this standpoint, 
cooperation means the association of persons for the pur- 
pose of joint economic effort. Cooperative enterprises 
usually assume one of three forms: (i) cooperative bank- 
ing, (2) cooperative consumption, and (3) cooperative 
production. 

Cooperative banking is an attempt to secure certain 
financial benefits through associations of individuals in 
Cooperative the form of insurance companies, building so- 
banking. cieties, or fraternal organizations. From the 
organization of the first Mutual Fire Insurance Associa- 
tion in 1752, the growth of this kind of cooperation has 
been rapid in the United States. To-day it is everywhere 
prevalent in the form of assurance societies, building as- 
sociations, lodges, and fraternal societies. The chief 
purpose of the protective organizations is, of course, to pay 
certain benefits in case of death, accident, and sickness ; 
while the building societies enable thousands of Ameri- 
cans to purchase their own homes. Ail of these associa- 
tions have met with considerable success. 

Cooperation in consumption is the association of in- 
dividuals for the purpose of securing certain advantages 
in the purchase of goods. The cooperative 

Cooperative m P 

consump- store is a good example of this kind of coopera- 
tion. This economic experiment had its origin 
in England among a few poor weavers of Rochdale, who 
contributed to the purchase of a bag of flour. By this 
means, retail quantities of flour were secured at whole- 



Experimental Programs 471 

sale prices. From this small beginning the cooperative 
movement in England has grown until, to-day, it num- 
bers its members by hundreds of thousands. In memory 
of its originators, the cooperative society in charge of the 
system is called the " Rochdale Pioneers." 

In America, however, this movement of cooperative 
consumption has never attained a like development. 
The numerous experiments undertaken in this direction 
have usually failed to attain any permanent success. 
For example, in 1845, tne fi rst protective union store was 
organized in Boston. A dozen persons with " the faith of 
God in their hearts " purchased a box of soap and half a 
box of tea. From this small beginning grew the New 
England Protective Union, which rapidly developed into a 
large organization with four hundred branches. How- 
ever, dissensions crept into the ranks, and, within a few 
years, the association was practically non-existent. Simi- 
larly, the " Sovereigns of Industry," which like the " Pa- 
trons of Husbandry " grew to great proportions, made 
repeated but unsuccessful attempts to adopt the Roch- 
dale system at its local centers. Finally, the " Knights 
of Labor " took the field and declared for cooperative 
institutions. However, little of a definite character was 
actually accomplished, and the order declined in im- 
portance without having permanently advanced the 
cause of cooperation. 

The advantages of consumers' cooperation are quite 
evident. In the first place, the intermediate trader being 
eliminated, his gains are deducted from the cost of market- 
ing. By wholesale buying, a member of the cooperating 
group is able to secure his goods at a reduced price, or to 
share in a common surplus at the end of the year. Then, 



472 American Economic Life 

again, through a knowledge of consumers' needs, and, 
through saving in advertising, the expenses of operation 
are considerably reduced. It is also apparent that the 
stores will be managed, not for private gain, but for the 
good of the community. The store, in its turn, is guar- 
anteed a loyal constituency. 

In view of these advantages, it appears surprising that 
consumers' cooperation has not developed more fully in 
the United States. However, there seem to be four chief 
difficulties in the way of its development. First, the 
country is so large and the interests of the various sec- 
tions so diverse, that it has not been possible to develop 
such a general movement as that which exists in Great 
Britain. Secondly, in the modern American city, retail 
stores have been organized on a large basis, and a great 
many of the petty annoyances and short-sighted policies 
of the old retail system have been eliminated. In the 
third place, in the retail business in the United States, 
great private business interests have proved to have ad- 
vantages in economy far above those possessed by the co- 
operative business. Finally, American producers are 
strongly organized, and, in all probability, by limiting 
production or by refusing to sell goods to such organiza- 
tions, they would attempt to cripple cooperative under- 
takings. 

Cooperative production is an association of persons for 
joint production, usually in the field of agriculture or 
Cooperative manufacturing. In this experiment, the co- 
production. operating parties furnish their own capital, and 
the income from the sale of the product is divided among 
the cooperating producers. In America, various at- 
tempts have been made in this direction. For example, 



Experimental Programs 473 

at one time, the " Sovereigns of Industry " had thirty 
manufacturing establishments with a capital of nearly 
half a milhon dollars. The " Knights of Labor " also 
attempted, with as little success, to organize various 
productive enterprises, including boot and shoe com- 
panies, clothing companies, and tobacco factories. On 
the other hand, experiments in productive cooperation in 
creameries have been quite successful. Throughout many 
agricultural districts there exist such creameries, managed 
advantageously on a cooperative basis. With this ex- 
ception, producers' cooperation in the United States can 
not, as yet, be called successful. The chief reason for this 
failure may be found in the difficulty of securing capital 
and good business management for such productive enter- 
prises. 

The advocates of cooperation regard it as an unfailing 
basis for the solution of many problems of American 
economic life. An impartial analysis of the ^ , , x 

t r J Outlook for 

success of this system in the United States does coopera- 
not seem, however, at present to justify this tI0n ' 
belief. Perhaps the fundamental difficulty in the way 
of its successful operation in this country is found in the 
still prevalent individualistic attitude of Americans towards 
the problems of economic life. Therefore, with the ex- 
ception of the success attained in such cooperative enter- 
prises as building and loan associations, assurance societies, 
and fraternal organizations, together with the successful 
consumers' cooperation in England and in parts of America, 
the cooperative system has not furnished sufficient ground 
for the belief that it will prove an immediate remedy for 
the permanent improvement of the economic condition of 
the American worker. If cooperation is to furnish an ade- 



474 American Economic Life 

quate solution of economic problems in American life, it 
must first succeed in production ; and there it has generally 
failed. 

QUESTIONS FOR RECITATION 

i. What is profit sharing ? What is its purpose ? 

2. Would the wage system be affected by the principle of profit 
sharing ? Explain fully. 

3. Explain the different methods of sharing profits. Which is 
the most successful ? Why ? 

4. What are the objections to the method of sharing profits 
through participation in stock ownership ? 

5. Give examples of profit sharing in your own community. 

6. Who has the greatest profit-sharing scheme in the United 
States? What would be the effect of making this plan general in 
all American industries ? 

7. What is the outlook for profit sharing in the United States? 

8. What is welfare work ? Give examples. 

9. Do you regard this scheme of social betterment as funda- 
mental ? Why ? 

10. What criticism has sometimes been made of welfare work? 
Is it true ? 

11. In what fields is welfare work most highly developed? 

12. Explain the most successful form of cooperation in Ameri- 
can economic life. 

13. Explain consumers' cooperation. Give examples. 

14. What is producers' cooperation? Why has it generally 
failed in the United States? 

15. What are some of the differences between the cooperative 
movement in this country and in England? 

16. Discuss the future of the cooperative movement. 

PROBLEMS FOR DISCUSSION 

1. What has been the success of profit sharing in the United 
States ? 

2. What is the attitude of the average employer toward profit 
sharing? Why? 



Experimental Programs 475 

3. What attitude does the public take toward profit sharing? 
Why? 

4. Do you expect profit sharing to become general in the United 
States? State reasons. 

5. Have you any criticism against the principle of profit shar- 
ing? 

6. Investigate the systems of welfare work which have been 
adopted by local employers. What are their strong points? Their 
weaknesses ? 

7. If you were managing a department store, what welfare meas- 
ures would you adopt ? 

8. What future has welfare work ? 

9. Can you make any general observations concerning the 
likenesses of these two experiments? The differences? 

10. W T hat are the reasons for the success of cooperation in Eng- 
land? 

.11. Why has cooperation not been so successful in the United 
States ? 

12. What is the strength of the cooperative program? What 
is its weakness ? 

13. What steps would be necessary before cooperation could be 
generally established in the United States ? 

14. What economic forces led to cooperation among American 
farmers ? 

15. What has forced retail grocers into a kind of cooperation? 

SUPPLEMENTARY READING 

Fay, C. F. Cooperation at Home and Abroad. 

Gilman, N. P. Profit Sharing. 

Gilman, N. P. A Dividend to Labor. 

Hoxie, R. J. Scientific Management and Labor. 

Schloss, D. F. Methods of Industrial Remuneration. 

Taylor, F. W. Principles of Scientific Management. 

Webb, C. Industrial Cooperation. 



CHAPTER XLVI 

The Program of Labor 

I. Nature of unionism 
i. Its significance 

2. Its national scope 

3. Its industrial character 

II. Program of unionism 

1. Higher wages 

2. Shorter hours : 

a. American conditions 

b. The reasons 

3. Improved working conditions 

III. Weapons of unionism 

1. The trade agreement 

2. The strike : 

a. Its meaning 

b. Effect on labor 

c. Effect on employer 

d. Effect on the public 

3. The boycott : 

a. Its meaning 

b. Its different forms 

4. Outlook for unionism 

a. The benefits 

b. The dangers 

Nature of Unionism. — Because the modern labor union 
relies solely upon itself to secure individual prosperity 
and group welfare, it is labor's most distinctive instrument 
of social betterment. Its program contemplates no vol- 

476 



The Program of Labor 477 

untary assistance from the employer in the form of shar- 
ing his profits, or receiving gratuitous benefits at his 
hands. Its real significance lies in the fact that i ts S i g . 
it is democratic, not aristocratic, and that it repre- ™Z c ™ce. 
sents a voluntary association of equals striving themselves 
to improve their own condition. While the union was 
originally an experiment and, in some respects, is still in 
the formative period, the movement has grown to such 
proportions and represents such definite demands that, 
to-day, it is fast constituting an actual program of economic 
reform. 

Formerly, unions were local and affected only a partic- 
ular trade. To-day, they are national and embrace rep- 
resentatives of many trades. In the attempt it s national 
to nationalize the union, the movement was sc °P e - 
first begun in some one trade, such as that of typographi- 
cal workers. Gradually, however, it extended to an at- 
tempt to organize all the workers of the country. Thus, 
in 1 88 1, the American Federation of Labor was established, 
and it has succeeded in affiliating with it the majority of 
the trade unions of the United States. Its success in this 
great scheme for the organization of labor is due to the fact 
that it allows the local unions large powers of control, and 
requires that only the greater questions be referred to the 
officers of the Federation. 

A union which was composed of the workers of one trade, 
like that of carpenters or bricklayers, was at first called a 
" trade union." Two great changes that took . 
place in the last quarter of the nineteenth cen- trial charac- 
tury have, however, made this term misrepre- ter ' 
sentative of present conditions. In the first place, through 
division of labor and specialization in industry, trades 



478 American Economic Life 

have been so split up that they no longer exist in their old 
forms. A man is no longer a cabinetmaker, but a " gluer," 
ora" lathe man." Then, again, the influx of large num- 
bers of immigrants and the growth of a large class of com- 
mon labor have made it necessary for the trade union, if 
it would succeed, to take into its membership men who 
are not highly skilled in any special trade. For example, 
the union of the United Mine Workers of America includes 
miners, door tenders, laborers, drivers, trackmen, and other 
kinds of common labor. Thus the old " trade " union 
has been transformed into the modern " labor " union with 
a distinctly industrial character. 

Program of Unionism. — At the present time, the demands 
of unionism are so clearly formulated that they may well 
Higher be termed a definite program. The union's 

wages. activities are directed chiefly toward the attain- 

ment of three ends : (1) higher wages, (2) shorter hours, 
and (3) better working conditions. It is also true that 
the union sometimes attempts to raise the level of intelli- 
gence among its members, and to awaken in them a realizing 
sense of their responsibilities. However, the chief em- 
phasis of the union is laid upon higher wages and shorter 
hours of work. The effect of the organization of labor 
upon wages has already been discussed in the chapter on 
the Theory of Wages. It was there seen that, through 
organization, labor is able to develop strong monopoly 
power. Armed with this power of group monopoly, labor 
can, through the union, make its demands upon the em- 
ployer and, by securing higher wages, better its condition. 
The union, through its monopoly power, is attempting to 
secure a larger share of the product of industry, and in many 
cases, as in the building trades, has met with marked sue- 



The Program of Labor 479 

cess. In this direction, the work of the union is becoming 
most effective. 

Next in importance to the cause of labor is the demand 
of the union for shorter hours of work. This has been 
crystallized into the eight-hour-a-day slogan, 
which in some countries, especially Australia, hours: 
has accomplished notable results. However, for American 
many workers in the United States ten hours still 
constitute a working day, although a number of industries are 
conducted on an eight-hour basis. Saturday half -holidays 
are the rule in most of the cities, and it is becoming more 
and more common to give short summer vacations. In 
the United States it is generally conceded that the legis- 
latures have the right to regulate the working hours of 
children, and numerous state laws have been passed ac- 
cordingly. In the case of women, the Supreme Court has 
decided that the length of their working day may be regu- 
lated on the ground of woman's physical inferiority. The 
labor of men cannot be so easily regulated, unless it can be 
definitely shown that the health and morals of the com- 
munity are endangered by the long continuance of such 
labor. 

The reasons for this demand of labor for shorter hours 
are threefold. In the first place, in normal times there is 
no longer any great necessity for long hours of 
continuous work. In former days, when living 
was precarious, such a necessity did exist, and the tradition 
that life could not be maintained without hard and con- 
tinuous work gradually grew up. To-day, rightly or 
wrongly, labor is struggling to break down this tradition. 
Again, with a legitimate amount of spare time, it is possible 
for men to do greater and more effective work. Shorter 



480 American Economic Life 

hours mean higher efficiency. Finally, the wide use of 
machinery in industry has not only made the output of 
goods greater, but has also caused labor to become more 
monotonous and nerve racking. As a relief from this 
monotony and strain, labor demands more time for im- 
proved health and social betterment. 

While higher wages and shorter hours result in immediate 

advantages to labor, it is also important that the general 

conditions under which labor works should be 

Improved 

working improved. For this reason, the union makes 
con ltions. ever y a ttempt to better the working conditions 
and the surroundings of labor. Through the efforts of the 
union, aided by philanthropists and social workers, legis- 
latures have enacted many laws against child labor, sweat- 
shops, dangerous working conditions, and other indus- 
trial abuses. This legislation has proved of benefit, not 
only to labor, but to the whole community. While, there- 
fore, the main object of unionism has been to improve the 
working conditions of members of its own group, its benefits 
have frequently been enjoyed by labor in general. 

Weapons of Unionism. — What instruments does the 
union employ to carry out this program of higher wages, 
The trade shorter hours, and better working conditions? 
agreement. As a ru j e? there are three powerful weapons in 
the hands of organized labor which it may use to accomplish 
its purpose : (1) the trade agreement, (2) the strike, and 
(3) the boycott. The trade agreement, as the name 
signifies, is simply an agreement in a given trade, or group 
of allied trades, between the employer and the workers. 
The employer on his side makes a bargain with a committee 
representing the workmen on their side. The trade agree- 
ment is thus a " collective bargain," and the great majority 



The Program of Labor 481 

of industries in which unions exist are conducted under 
such collective bargaining. Of course, the success and 
effectiveness of this agreement depend largely on a solid 
body of union workers. For this reason, the union naturally 
desires a " closed shop," that is, an establishment in which 
only organized labor is employed. On the other hand, the 
employer may prefer an " open shop," in order that he 
may have more freedom of choice in the employment of 
labor. 

When unavoidable friction occurs between the employer 
and the workers concerning the terms of a trade agreement, 
or some equally important matter, the union The strike: 
attempts to enforce its demand by means of the Meaning. 
strike. The strike is an organized cessation of work 
initiated by the employees for the purpose of securing 
their terms, or of resisting those of the employer. It is a 
revolutionary measure and can be justified only by some 
most unusual condition of affairs. Because of its deep 
and widespread consequences, this weapon should never 
be employed by the union except as an absolutely final 
resort to secure just demands. 

The effects of the strike are threefold. In the first place 
it affects the worker. By means of it, he may be able to 
force the employer to grant higher wages, or Effect on 
shorter hours, or better working conditions. On labor - 
the other hand, the strike may prove a calamity to the 
average worker. Wages stop at once, and, while the union 
men may be supplied with strike benefits, these are often 
inadequate to meet the demands of family life. Then, 
again, when work is resumed, oftentimes the leaders of a 
strike, and sometimes the strikers themselves, are not 
reinstated by the employer. If these men live in a small 



482 American Economic Life 

town, depending upon one or two industries, their position 
becomes quite precarious. Altogether, the strike offers 
to labor a very uncertain remedy. 

To the employer, the strike involves serious consequences. 
Of course, it is true that, should he win the strike, he would 
Effect on secure more absolute control over his business 
employer. an( j j-^ g^g ^ decrease wages, lengthen hours, 
and impose his own working conditions. On the other 
hand, the enforced idleness of his plant entails great finan- 
cial loss. In addition to this, much property may be 
destroyed by violence. Again, if he loses the strike, the 
extra expense entailed by such losses seriously handicaps 
the employer in resuming his business operations. For 
these reasons, the employer is opposed to strikes. 

Finally, strikes seriously affect the public ; and, because 
of this fact, it is generally agreed that the public should be 
E £ ect the final arbiter of disputes between labor and 

on public. capital. A strike curtails production. The 
public, therefore, will have less to consume during the 
ensuing period. Then, too, as is the case in nearly all 
great conflicts between labor and capital, a strike is often 
followed by an increase in prices which falls heavily upon 
the public. The strike also seriously menaces social wel- 
fare through destruction of property and violation of law. 

In addition to the trade agreement and the strike, the 
union possesses still another weapon — the boycott. This 
The boy- ls simply an organized refusal on the part of a 
cott: group of persons to buy goods from another per- 

Meamng. gon ^ or g r0U p f persons. It may be used by 
opposing business houses, but it is chiefly the weapon of 
the worker and of the public. It has several distinct forms, 
some of which may be legally employed ; but the courts, 



The Program of Labor 483 

through injunctions, have sometimes prevented the use 
of the boycott in its worst forms. 

In the simple boycott, a group of persons, who have been 
working for a certain employer, peacefully refuse to buy 
his products. In the compound boycott, the Its different 
workmen directly interested in injuring the boy- f° rms - 
cotted company refuse to deal with those who decline to 
join in the boycott. This form of boycott has been regarded 
as a conspiracy and declared illegal. The third form of 
boycott is negative in character and is known as the " fair 
list," or " white list." In the first case, the union periodical 
publishes a list of firms described as " fair " because they 
work under union hours, pay union wages, and employ 
union men. In the second case, the Consumers' League 
publishes a list of firms described as " white " because 
they do not violate factory laws or other rules agreed upon. 
The fourth form of boycott is the " unfair list," or, as it 
has been called, the " we don't patronize " list. In this 
case, the labor periodical actually publishes the names of 
firms that do not provide fair conditions for their employees, 
and thus urges the public not to purchase their goods. The 
Supreme Court has, in certain cases, prohibited the use of 
this form of the boycott. It may be said, however, that 
as a result of the Clayton Act of 19 14, the court may per- 
haps revise its former decisions on this subject. 

Armed with the strike and the boycott, and using the 
collective bargain to secure its end, modern unionism has 
made innumerable attempts to raise wages and outlook 
to bring about better working conditions. The for . . 

° unionism : 

success attending both these efforts has been The 
widespread. However, because of the rise in bene fi ts - 
prices, the advance in wages has often been more apparent 



484 American Economic Life 

than real. On the other hand, an actual and permanent 
gain, in the form of shorter hours and improved working 
conditions, has resulted from union activities. Another 
beneficial effect of labor unions is found in their educational 
activities. The debates and discussions of the union 
stimulate mental activity, and offer opportunities of 
social culture and advancement. Furthermore, labor 
unions often help the worker in time of sickness and dis- 
tress, providing relief in case of accident, death, or unem- 
ployment. Finally, the greatest benefit of modern union- 
ism is to be found in its effect upon the standard of living 
of workingmen. The steady advance in the standard of 
living enjoyed by American laborers is almost altogether 
traceable to the powerful influence of unionism in securing 
a higher wage, and in maintaining that wage when once 
secured. 

On the other hand, the program of labor is not without 
its dangers. The union is frequently charged with reduc- 
ing the level of group efficiency to that of its 
least efficient worker. Furthermore, there is no 
doubt whatever that labor unions sometimes limit output 
and thereby curtail production. In unusual times, like 
the period of the World War, this decreased production 
constitutes a serious social menace. Under such circum- 
stances, partly because of this limited output, abnormally 
high prices prevail, the burden of which falls upon the 
general public. Through labor unions, class antagonisms 
may also be engendered, and the solidarity necessary to 
true national greatness may be jeopardized. The labor 
agitator and demagogue may do untold harm to society 
by widening the breach between labor and capital. Of 
this character is the agitation of such labor organizations 



The Program of Labor 485 

as the Industrial Workers of the World, which openly 
preaches class war, direct action, and the destruction of 
private property. No condemnation can be too severe for 
this kind of radical labor organization. Labor must be 
amenable to the laws of social justice, for its alliance with 
radicalism will result in its own destruction. The cause 
of true unionism suffers, also, when labor organizations are 
unfair in their demands, and threaten to accomplish their 
ends through anti-social action. Whatever may be the 
consequences to labor, the rights of the public must be 
protected. Labor, no more than capital, may be allowed to 
wield unjust monopoly power. 

QUESTIONS FOR RECITATION 

1. How does the program of labor differ from the idea of profit 
sharing ? Which is the more democratic ? Why ? 

2. Describe how the trade union developed into the labor union. 
Through what organization was this accomplished? Why is it so 
successful ? 

3. What industrial changes made necessary the evolution of the 
trade union into the labor union ? 

4. What are the definite demands of the labor union ? Are they 
all equally important ? 

5. Why can industrial workers secure higher wages through the 
union than by individual action ? 

6. Is the eight-hour demand any more reasonable now than it 
was a hundred years ago ? Why ? 

7. In the United States, what legal difficulties are sometimes 
encountered in the attempt to regujate hours of labor ? 

8. What has the union accomplished in the way of improved 
working conditions ? 

9. What is the " trade agreement " ? How is it arrived at? 

10. What is the difference between the "closed shop" and the 
"open shop " ? Which do you advocate ? Why ? 

11. Define a strike. Discuss its threefold effects. 



486 American Economic Life 

12. Give some examples of great strikes, with their consequences. 

13. What is a boycott? Give an example with which you are 
familiar. 

14. Distinguish between the simple and secondary boycott. 

15. What is the difference between the "fair list" and the "un- 
fair list " ? Which has been declared illegal ? 

16. How may the Clayton Anti-trust Act of 1914 affect the 
activities of labor unions ? 

17. Summarize the advantages of labor unions. Which is the 
greatest ? 

18. Do you support everything that unionism permits? Why 
not? 

19. Would you permit labor to do things you would not permit 
capital to do ? Explain. 

20. Outline the chief dangers or evils that may accompany un- 
bridled unionism. 

PROBLEMS FOR DISCUSSION 

1. Discuss the value of collective bargaining to the labor union. 

2. How much justice is there behind the collective bargain? 

3. Discuss the economic basis for the eight-hour day. 

4. Discuss the effect of an eight-hour day on the quality and 
quantity of the output. 

5. What is the effect of pace setting on the product? 

6. Why do men strike ? Discuss its justifiability. 

7. Is the "strike" spirit a good one for the community? Why 
not? 

8. Can the " strike " spirit be eliminated ? How ? 

9. Discuss the D anbury Hatters' Case. 

10. Is the "boycott" spirit a good one? Why not? 

n. If you were a wageworker, would you feel that your inter- 
ests and those of your employer were essentially opposed? State 
reasons. 

12. Under what circumstances might unions be of advantage to 
employers as well as to employees? 

13. Should union activity be permitted to interfere with industry? 
Why not? 



The Program of Labor 487 

14. What would be the significance of the entrance of the union 
into politics ? 

15. Discuss the idea of compulsory arbitration. 

16. Should railroad employees be permitted to strike? 

17. Has the public any rights in conflicts between labor and 
capital ? 

18. What is a "lockout"? 

19. How may labor participate in the management of industry? 

SUPPLEMENTARY READING 

Adams, T. S. and Sumner, H. L. Labor Problems. 

Ashley, W. J. The Adjustment of Wages. 

Cole, G. D. H. The World of Labor. 

Commons, J. R. Trade Unionism and Labor Problems. 

Laidler, H. W. Boycotts and the Labor Struggle. 

Lowell, J. S. Industrial Arbitration and Conciliation. 

Mitchell, J. Organized Labor. 

Pigou, A. C. Principles and Methods of Industrial Peace. 

Reeves, W. P. State Experiments in Australia and New Zealand. 



CHAPTER XL VII 

The Program of Regulation 

I. Development of regulation 
i. The individualistic attitude 
2. The social attitude : 

a. Necessity for regulation 

b. The modern test 

c. The government's duty 

II. Regulation through police power 
i. Its meaning 
2. Its application : 

a. Hours of work : 

(i) Of women and children 
(2) Of adult males 

b. Sanitation : 

(1) Of factories 

(2) Of houses 

c. Food inspection 

III. Regulation of prices 

i. Principle of "cost price" : 

a. Its meaning 

b. Its requisite 

2. Examples of regulation : 

a. Control of labor 

b. Revision of tariff 

c. Control of trusts 

d. Price regulation 

3. The outlook 

Development of Regulation. — The western world of 
the latter eighteenth and early nineteenth centuries was 



The Program of Regulation 489 

dominated by the idea of individual freedom. In phi- 
losophy, legislation, industry, religion — everywhere — the 
spirit of democracy had taken hold upon the . . 
people. This democracy, however, was essen- uaUstic 
tially different from democracy as it is thought of attltuae - 
at the present time. The individual then, as now, was the 
factor of primary interest in social progress. Yet indi- 
vidual welfare, according to the view prevailing at that 
time, was to be secured through individual freedom. The 
policy of laissez faire — "let alone " — was rigorously 
enforced, so that any activity of the individual was justi- 
fied, provided it did not interfere too seriously with the 
welfare of the remaining members of society. 

The opening years of the twentieth century still reveal 
the presence of the spirit of democracy, but in an essentially 
different form. The eighteenth and nineteenth The social 
century democracy commanded the government attltude: 
to leave the individual practically free to do as jolTelu- 
he pleased. But more than a hundred years of lation - 
this individual freedom have shown, to the satisfaction of 
a great majority, that the eighteenth century laissez-faire 
philosophy often resulted in much evil. Society is not 
always justified in letting the individual take his course; 
because, if an individual has anti-social ideas and is left 
free to do as he pleases, society must suffer from his un- 
restricted freedom. The industrial monopolist believes 
that he should be " let alone," but, from this point of view, 
society does not agree with him. He is dependent upon 
society for his power, and, like any trustee, must give an 
account of his stewardship. 

Thus, in the first half of the twentieth century, men 
are measuring proposed actions by the test of social welfare. 



49° American Economic Life 

The question which is raised is not merely one of individual 
right, but "of social justice. Does a man wish to conduct 
The modem his business in a certain way? What will be the 
test. effect of his act upon society ? If it be harmful 

to the community, society is coming to the view that such 
action should be forbidden, or limited by social restraints. 
For example, when woman first entered industry, the 
employer imposed long hours of labor and improper work- 
ing conditions upon her. When society realized that the 
effect of such action was detrimental to social welfare, it 
demanded that the employer's conduct in this direction 
be subject to restrictions designed for the good of the com- 
munity. According to this view, social welfare becomes the 
test of individual action. 

Under this spirit of social control the program of govern- 
ment regulation has developed with surprising rapidity. 
The govern- Jefferson, more than a century ago, said, " That 
ment's duty, government is best which governs least." Now, 
however, it is regarded as government's duty to regulate 
the limits beyond which the individual may not pass and 
remain free from social punishment. Proceeding on this 
principle, society regulates rates, inspects factories, requires 
fire escapes, and, in various other directions, controls free- 
dom of individual action. 

Regulation through Police Power. — The first attempts 

at general regulation by the government were made through 

its " police power." By police power is meant 

Itsmeaning. . , . , , i '.,.., , 

the authority of the state to regulate individual 
action for the general good. Of course, government must 
protect its citizens. Men must not be wantonly murdered ; 
property must not be unjustly appropriated ; the public 
peace must not be unnecessarily disturbed. The activities 



The Program of Regulation 491 

of government in these directions are, therefore, a natural 
part of the sovereignty of the state. But government may 
also exercise, in other directions, its power to protect, not 
only the safety, but also the health and morals of the 
community. 

In pursuance of this legal doctrine, we have seen that 
the work of women and children has been so regulated that 
their health and safety are conserved. For w 

Its appli- 

example, it is unlawful to employ children under cation : 
a certain age in a factory, because social welfare Hours 
demands that children shall have a minimum of 
education before taking up the tasks of life. Women, 
too, are forbidden to work more than a certain number 
of hours per week ; and employers are compelled to provide 
specified sanitary conveniences, because the courts have 
ruled that the health, safety, and morals of society depend 
upon these regulations. For example, Congress has 
enacted a law limiting the hours of labor for women working 
in factories, hotels, and shops in the District of Columbia 
to eight hours a day ; the legislature of Ohio has passed a 
law, which has been upheld by the Supreme Court of the 
United States, limiting the hours of labor for women em- 
ployed in certain industries to ten hours a day ; and the 
state of Oregon has enacted a statute, likewise declared 
constitutional, providing for an Industrial Welfare Com- 
mission to fix hours of labor, minimum wages, a.r>d condi- 
tions of labor for working women. 

In America, legislation concerning working conditions 
has confined itself, until recently, to the passage of such 
laws regulating the labor of children, the hours and working 
conditions for women, and the safety of workers. Under 
the American system of government, the adult male worker 



492 American Economic Life 

has sometimes been denied legislative protection on the 
ground that he is free to contract as he pleases. After a 
laborer once chooses to work in a dangerous or unhealthful 
trade, the court has frequently held that he takes upon 
himself the responsibility for any danger that may attach 
to the trade. Again, the court has declared that a man's 
labor is his own, and that it would be an infringement upon 
his personal liberty to limit his hours of work. Further- 
more, the advocate of freedom of contract has relied upon 
the constitutional restriction that no person shall be de- 
prived of life, liberty, or property without due process of 
law. For all these reasons, it has been extremely difficult 
to secure legislation limiting the hours of labor for work- 
ingmen. Nevertheless, some progress has been made in 
this direction. For example, the Supreme Court has 
declared constitutional a Utah law prohibiting miners from 
working more than eight hours a day, although it has 
declared unconstitutional a New York law prohibiting 
bakers from working more than ten hours a day. A great 
advance, however, was made in 191 7, when the Supreme 
Court of the United States declared constitutional Oregon's 
law fixing a ten-hour day for workingmen in manufacturing 
establishments. Other states have also passed laws limit- 
ing hours of labor in such manufacturing concerns as smelt- 
ing plants, plaster and cement mills, plate glass works, 
rolling mills, irrigation works, sawmills, cotton and woolen 
mills, and similar establishments. Among the measures 
taken to protect adult male workers should also be men- 
tioned the various State Workmen's Compensation Acts, 
as well as the Federal Employers' Liability Act of 1908. 

In recent years, the police power has been widely exer- 
cised in the regulation of sanitation. It is but a generation 



The Program of Regulation 493 

since houses and factories were constructed in any way 
that would suit the convenience or whim of the builder. 
Recent scientific investigations, which have made 

. r Sanitation. 

known the effects of bad air and lack of necessary 
sanitary conveniences upon workers in factories, have led 
to factory legislation aimed directly at the evil of insanita- 
tion. While these measures have not in all cases been en- 
forced, they exist on the statute books as an indication 
of legislative opinion on the subject of public health. 

Attempts have likewise been made to improve the sani- 
tation of houses. Formerly it was generally believed that 
a man's house was his castle ; that men had a right to pri- 
vacy and freedom at home ; and that the conditions there 
surrounding their lives were a matter of indifference to 
the public at large. The reverse of this attitude is seen in 
the modern treatment of disease. In a densely settled 
neighborhood it is a matter of much more than individual 
concern that a man has smallpox. Therefore, particularly 
in newer cities, many efforts in the form of city planning 
have been made to improve living conditions. The size, 
air space, sanitation, and construction of houses are becoming 
subject to strict regulation because of their effect upon in- 
dividual and social welfare. 

Another field in which regulation has become especially 
necessary is in connection with food adulteration. Society 
is often menaced by the evils of adulteration and falsification 
of goods, which sometimes threaten the very pood 
life and health of the community. The United ™*P"ti™- 
States has been slow to abandon the doctrine of laissez 
faire — or non-interference — in the domain of food and 
ware inspection. However, a beginning has been made in 
this direction through the passage of the Federal Pure Food 



494 American Economic Life 

and Drugs Act, which aims to check effectively the adul- 
teration of food and drink. Before the passage of this act, 
food adulteration was widespread; but, with its passage, 
a gradual change is being effected in the attitude of the 
manufacturer regarding his duty to the public. 

Regulation of Prices. — Another form of government 
regulation is the attempt, championed by Professor Clark 
" Cost °^ Columbia University, to secure " cost price." 

price ": a " cos t price " is a price equivalent to the cost 
its meamng. f p roc [ uc tion plus a reasonable gain to the 
producer. Therefore, according to this view, in the fixing 
of cost price no element of monopoly power or special 
privilege should enter. Cost prices, Professor Clark main- 
tains, are just prices. Accordingly, social justice demands 
that the consumer be given the benefit of modern discovery 
and inventions, so that, when a device is perfected which 
lowers the cost of production, the price of the commodity 
in question may be proportionately reduced. 

Cost prices depend, therefore, upon free competition. 

We have seen that, as a matter of fact, prices are to-day 

often determined by monopoly power. Con- 

I Is requisite. •• V r ,♦,♦ i 

sequently, these two forces — competition and 
monopoly — come into conflict. Both cannot exist at 
the same time. If competition is to be restored and cost 
prices established, monopoly power must be regulated. 
That is to say, whenever monopoly power attempts to fix 
prices, the government must interfere in an attempt to 
reestablish conditions of competition. The regulation of 
monopoly power becomes a requisite to the principle of 
cost price. 

Proceeding on this basis, the advocates of this doctrine 
desire to regulate all forms of monopoly so that cost prices 



The Program of Regulation 495 

may be assured. If, for example, labor, through its 
monopoly power of organization, fixes too high a price for 
its services, it must be subjected to government £xam lgg of 
regulation. No exception is to be made in its regulation: 
favor. When the union uses its weapons so Control of 

1 labor. 

effectively that it develops into a monopoly 
organization, it destroys that free competition upon which 
the adherents of this school believe the price of labor should 
depend. The program of regulation, therefore, includes 
labor within its sphere of activity. It may readily be 
seen that this program is directly opposed to the teachings 
of those who advocate the development of unrestrained 
monopoly power on the part of labor. 

In the same way, the manufacturer must not be allowed 
to profit by special privilege. Whenever an unfair advan- 
tage has been given him by reason of undue pro- R ev i s i on f 
tection against foreign competition, the govern- iari £- 
ment must revise its former act. There is little doubt that 
prices have been artificially raised by means of special 
privilege accorded the manufacturer through protective 
legislation. These prices are certainly not cost prices. 
Therefore, to restore the latter, the government must re- 
vise tariff acts and regulate the business of the manufac- 
turer. 

This principle of government regulation has, however, 
as we have already seen, been chiefly applied to the control 
of great combinations of capital in the form of control of 
trusts and railroads. Enough has been said trusts - 
in previous chapters to indicate the character of these laws, 
and their desired effects. It is only necessary at this point 
to call attention to the fact that they are the most repre- 
sentative American attempt to apply the program of govern- 



496 American Economic Life 

ment regulation to the affairs of society. Whether this 
program is completely practicable will, in large measure, 
be determined by the ultimate effect of railroad and trust 
legislation. Thus far, both groups of legislation are in a 
formative stage, and the future is still in doubt. 

Since the American entrepreneur, through the non- 
interference doctrine of the early nineteenth century, 
P r i ce naturally developed into a monopolist, it has 

regulation, become increasingly necessary for the community 
to exercise some effective restraint upon the exercise of his 
monopoly power. How is this to be accomplished ? During 
the period of the World War, Americans received their 
first extensive training in general price regulation. Com- 
missions were appointed (with power to regulate the prices 
of wheat, sugar, and coal) which developed an administra- 
tive machinery previously unknown to the American people. 
It may be that, with the experience thus acquired, America 
may in this spirit approach the problem of the control of 
monopoly power. Already, the existence of the Interstate 
Commerce Commission, the Federal Trade Commission, 
and the various Public Service Commissions of the Common- 
wealths, furnishes a nucleus for the development of such 
price-fixing commissions. It must be remembered, how- 
ever, that such a policy is fraught with danger when ad- 
ministered in opposition to natural economic laws. 

In conclusion, we may say that the program of govern- 
ment regulation is likely to succeed (1) if the police power 
rf , of the state is developed into an effective instru- 

The outlook. ^ 

ment for the protection of the worker, (2) if com- 
petition is restored, or monopoly power is effectively checked, 
and (3) if adequate instrumentalities are developed for 
representing and conserving social welfare. Through a 



The Program of Regulation 497 

progressive interpretation of protective legislation by the 
judicial organs of government, the first requisite may be 
accomplished. While it is doubtful whether American 
society will ever return to a pure regime of free competition, 
it is not impossible for the benefits of monopoly, through 
public control and regulation, to be enjoyed by the com- 
munity. Finally, the present development of industrial 
bodies and welfare commissions seems to indicate a grow- 
ing desire on the part of the public to solve industrial prob- 
lems in accordance with the principle of social welfare. 

QUESTIONS FOR RECITATION 

1. Explain the policy of la issez faire. Is it still advocated? 

2. Why has regulation of industry become necessary? Give 
examples. 

3. How should we measure individual actions to-day? Why? 

4. Define the police power. Give examples of its exercise. 

5. Why is it easier to regulate the working conditions of women 
and children than those of men ? 

6. What laws have actually been passed for the protection of 
women and children in industry ? 

7. What are the chief legal obstacles in the way of regulating 
the labor of men ? 

8. What laws have actually been passed for limiting the hours 
of labor of workingmen ? 

9. Explain the work accomplished, through government regula- 
tion, in the matter of sanitation. 

10. What is the government — both state and national — doing 
to secure pure food and honest goods ? 

11. What is "cost price"? How may it be secured? 

12. What must be regulated to insure cost prices ? Why? 

13. Who would naturally oppose the idea of cost prices? Why? 

14. Apply the program of government regulation to labor. 

15. What do the Sherman and Clayton Anti-trust Acts attempt 
to do? 



498 American Economic Life 

1 6. How could prices be regulated by the government? Do you 
approve of this policy ? 

PROBLEMS FOR DISCUSSION 

i. Discuss the advantages and disadvantages of individualism. 

2. Is there any rule for determining the limits of state inter- 
ference with individual liberty ? 

3. In what way does the exercise of police power justify govern- 
ment regulation of industry ? 

4. Explain carefully under what circumstances a legal eight- 
hour day might be justified under the police power. 

5. Is a cost price necessarily a just price? Defend your posi- 
tion. 

6. What is the attitude of the government regulationist toward 
a tariff on wool ? On antiques ? 

7. What control would the government regulationists exercise 
over capitalistic combinations ? Why ? 

8. Would an advocate of this program have the state fix rents? 
Why not? 

9. Discuss the effect of this program on the monopoly profits 
of entrepreneurs. 

10. Discuss the dangers of price-fixing. 

11. Contrast Jefferson's idea of government with the twentieth- 
century idea. 

12. What is the attitude of the governmental regulationist toward 
monopoly? Toward competition? 

13. What distinction has the Supreme Court made between the 
regulation of interstate commerce and internal manufacturing? 

14. What is the Federal Employers' Liability Act? Why are 
Liability Acts being superseded by Workmen's Compensation 
Acts? 

15. Describe some of the more important activities of the Federal 
government during the World War period. Did these constitute a 
fair demonstration of the program of regulation ? 

16. Discuss the possibilities of the program of government regu- 
lation. Is it likely to succeed ? 



The Program of Regulation 499 

SUPPLEMENTARY READING 

Andrews, I. Minimum Wage Legislation. 

Clark, J. B. and J. M. The Control of Trusts. 

Commons, J. R., and Andrews, J. B. Principles of Labor Legisla- 
tion. 

Ely, R. T. Monopolies and Trusts. 

Federal Trade Commission. Annual and Special Reports. 

Frankfurter, F., and Goldmark, J. The Case for the Shorter Work 
Day (2 vols.). 

Hutchins, B. L., and Harrison, A. A History of Factory Legisla- 
tion. 

Jenks, J. W. Governmental Action for Social Welfare. 

Ross, E. A. Sin and Society. 

Seager, H. R. Social Insurance. 

Van Hise, C. R. Concentration and Control. 



CHAPTER XLVIII 

Programs of Nationalization 

I. The Single Tax 
i. Its object 

2. Its meaning 

3. Its alleged advantages : 

a. Prevents land speculation 

b. Simplifies taxation 

c. Increases production 

d. Relieves poverty 

4. Its attempted justification : 

a. Land different from other property 

b. Land values largely social values 

5. Its limitations 

6. Its outlook 

II. Socialism 

1. Its distinctive character 

2. Its recent growth 

3 . Its chief criticisms of society : 

a. Exploitation of labor 

b. Growth of private monopoly 

c. Waste of effort 

d. Evils of competition 

e. Lack of justice 

4. Its leading principles : 

a. Government ownership advocated 

b. Private property opposed 

5. Its evils 

6. Its future 

7. Other radical doctrines 

500 



Programs of Nationalization 501 

Two other programs of economic reform depend for their 
success upon the action and support of government. Both 
of these may be described as programs of nationalization. 
In the one, the aid of government is invoked in order that 
society as a whole, rather than particular individuals, may 
enjoy the benefits of the increased valuation of land re- 
sulting from social action. In the other, government is 
relied upon to bring about not only the nationalization 
of land, — natural resources, — but also of capital, — 
the tools of production. The one is known as the Single 
Tax Theory ; the other, as Socialism. 

The Single Tax. — In his " Progress and Poverty," 
Henry George asks this question, " Why, in spite of the 
increase in productive power, do wages tend to a minimum 
which will give but a bare living? " Starting out with this 
query, George explains the coexistence of prog- 
ress and poverty on the ground that the land- 
lord class has appropriated, as rent, a great mass of wealth 
that should go to labor as wages, or to society as social 
income. He shows that the great increase in land values 
due to the growth of population (as evidenced by the fact 
that Manhattan Island alone in three hundred years in- 
creased in value one hundred million times) has gone, not 
to the people who created it, but has been appropriated, 
through the absorption of economic rent, by a few landlords 
in the form of an " unearned increment." Therefore, to 
restore this " unearned increment " to society, and thus 
to do away with the poverty of the masses, Henry George 
proposed that economic rent be confiscated by means of a 
single tax on the value of land. This plan is now univer- 
sally known as the Single Tax Theory. 

The Single Tax, to use Henry George's own words, is 



5<D2 American Economic Life 

"one single tax levied on the value of land irrespective of 
the value of improvements, in or on it." All machinery 
it s of taxation would be done away with, except 

meaning. fa^ necessary to assess and tax land values. 
Hence the name " Single Tax." Now it must be distinctly 
borne in mind that this Single Tax means a tax on land it- 
self, — not on any of its buildings or improvements. The 
tax is aimed solely at land values, and is thus an attempt 
to socialize the value of the land by turning over to the 
people its economic rent which has been termed an " un- 
earned increment." 

The advantages claimed for the Single Tax are, first, that 
while such a tax would be so high as to cove the full value 
of the bare land, it would not apply at all to the 
advantages: value of improvements upon land. Since these 
Pr events ■ improvements would remain untaxed, there 
would be every inducement to make them. At 
the same time, since land itself would be taxed to its full 
value, it is argued that there would be no inducement for 
land speculation. Nothing whatever would be gained by 
holding idle land. In this manner, while every encourage- 
ment would be offered land improvement, an effective blow 
would be given to land speculation. Our present system 
of taxation is said to encourage land speculation by tax- 
ing unimproved land at a lower rate than improved land. 

Another advantage claimed for the Single Tax is its 
simplifying effect upon the mechanism of taxation. The 
Simplifies present land tax would be retained, but the in- 
taxation. tricate system of internal revenue, tariff collec- 
tion, and income taxation would be abolished, and a great 
saving in the collection of taxes effected. The basis of 
taxation would be completely shifted from the value of 



Programs of Nationalization 503 

buildings, tools, machinery, and all processes and products 
of industry to the rental value of lots and lands. Further- 
more, there would be no chance to escape land taxation. 
Personal property may be concealed. Land, however, 
cannot be hidden from the assessor. 

In the third place, it is claimed that the Single Tax would 
increase the productive capacity of the community. Henry 
George believed that, of the three factors of increases 
production, land was monopolized chiefly. The P roducHon - 
Single Tax attempts to undermine this monopoly of land 

(1) by removing all taxes from labor and its products, and 

(2) by concentrating all taxation in a single tax on the value 
of land. It is therefore predicted that this substitution 
would take away any inducement for holding idle land. No 
one would desire " to corner " land for a " rise " in future 
value. Hence the land would be released for purposes of 
production. This substitution of the tax on land for taxes 
on industry would, it is claimed, free the active elements of 
production — labor and capital. At the same time, this 
substitution would bring into use more land than is now 
available for productive purposes. 

Finally, advocates of the Single Tax assert that it will 
relieve poverty by taking the " unearned increment " from 
the landlord and restoring it to society. In Relieves 
other words, wages will be increased through P° vert y- 
appropriation of rent. Hence the income of the masses 
will be enlarged at the expense of that of the landlords. 
Henry George firmly believed that the private appropria- 
tion of land values resulted in poverty, disease, and crime. 
He was absolutely convinced that exclusive taxation of 
land values would be followed by increased general pros- 
perity and social welfare. Then, too, since the Single Tax 



504 American Economic Life 

would fall most heavily on the cities where land values are 
greatest, the poorer agricultural districts would enjoy more 
general prosperity by being relieved of the burden of ex- 
cessive taxation. 

The advocates of the Single Tax argue, moreover, that 
it is just, because they do not regard land like ordinary 
its justi- private property. As the earth was not made 
cation: ^ man ^ j-^ mere iy supplies a temporary dwell- 
entfrom ing place for generations of mankind, the men 
property. k orn ^ ^ e wor \^ have an equal right to the 
free gifts of nature. Therefore, they assert, the natural re- 
sources of a nation should be used for the benefit of the 
entire nation ; and this condition of affairs can only be 
brought about by shifting the burden of taxation from 
the majority, who do not hold land, to the minority who 
do. Single Taxers believe that a tax laid on tools or any 
other creation of human labor violates a right of property, 
because it takes from the man who has created it part of 
the thing which he has made. They maintain that the 
tax on land values, however, takes from individuals nothing 
that they have actually created. 

Again, assert the Single Taxers, the value of land is not 
due to the work of man and, therefore, its value bears no 
Land values re lation to actual individual effort. For ex- 
sodai ample, the value which is created in the land as 

the result of the centralization of business in 
New York City is appropriated by a few individual land- 
owners. This, maintain the Single Taxers, is unfair be- 
cause they did not create the value of Manhattan Island, 
nor are they alone responsible for increasing it. This 
socially created value, they assert, should be used for the 
purpose of developing certain community interests. With 



Programs of Nationalization 505 

these properly secured and safeguarded, poverty would 
be at a minimum by reason of a more equal distribution of 
social income. 

It is highly improbable that the Single Tax would ac- 
complish all that its advocates claim. While the sincerity 
of their belief is undeniable, and the inspirational 
work of their leader compelling, the fact remains ^ons." 
that poverty is not due alone to the private appro- 
priation of rent from land. As a matter of fact, although 
rent has risen in the United States for the last century, 
wages have also risen because the sum total of social income 
has increased. The causes of poverty are so multitudinous 
that no one remedy can be found for its cure. While the 
Single Tax might somewhat relieve poverty, it certainly 
would not abolish it, or result in the establishment of com- 
plete and universal democracy. Assuredly, no thinking 
person can believe that the Single Tax would prove a pana- 
cea for all social ills. Furthermore, the justice of compelling 
one factor of production to bear all the burden of taxation 
is open to question. In a true democracy, capital and also 
labor should bear a fair, but proportionate, share of this 
burden. 

Whether the amount derived from land taxation alone 
would be sufficient to meet all the expenses of government 
is also a matter of legitimate dispute. However, 

r Its outlook. 

the present system of taxation is unquestionably 
imperfect. Therefore, the principle of the Single Tax 
would doubtless offer a solution for some of the chief evils 
of the present fiscal system. This principle has already 
been applied in New Zealand, Vancouver, and, in a some- 
what modified form, in England and parts of Germany. As 
a program it has never been afforded a really extensive 



506 American Economic Life 

opportunity to demonstrate its effectiveness. However, 
present indications point to a time in the near future when 
some of our American States, as well as several of the more 
progressive European countries, will be seriously remodeling 
their taxing systems on the basis of the Single Tax Theory. 
But the tremendous financial burdens imposed upon civili- 
zation by the World War may make it necessary to expand 
the Single Tax into a " Triple Tax " on land, income, and 
inheritance. 

Socialism. — While the Single Taxers hold to the social- 
ization of natural resources as a means of securing social 
its distinc- P ro g ress > another school of reformers — the So- 
tive charac- cialists — hold that, in order to attain social jus- 

ter 

tice, not only natural resources but also capital 
must be nationalized. While production would thus be- 
come socialized through the collective ownership of the tools 
of production, distribution would also become more or less 
nationalized through the appropriation of interest and 
profits, as well as rent, and through the consequent en- 
largement of labor's share of the social income. Thus the 
Socialist asserts the right of labor to the full product of 
industry. 

The recent growth of Socialism is one of the important 
phenomena of modern times. In several European coun- 
its recent tries its growth has been so rapid that many be- 
growth. Heve ft w jii eventually become a firmly estab- 
lished institution. Rapid progress in this direction has 
already been made in Germany, Italy, Austria, France, and 
Belgium. In 191 2, the socialist vote in Germany numbered 
over 4,250,000 ; while in France, in 1914, it approximated 
1,400,000. The social unrest following the World War 
served still further to increase not only the number of 



Programs of Nationalization 507 

Socialists, but also the number of still more revolutionary 
Radicals. In the United States, although Socialism has 
attracted to its ranks several hundreds of thousands of 
voters, the movement has not made such rapid strides as 
in European countries. The more stable and favorable 
economic condition of the masses has caused this movement 
to manifest itself chiefly in the extremes of American society. 
The kind of Socialism here advocated is largely a mixture 
of " Utopian " ideas with " Marxian " theories. 

The objections which Socialism makes to the present 
order of society seem to group themselves under five 
headings. First, there is the belief in the uni- its 
versality of exploitation. Exploitation means cnticisms: 
that an individual receives less than he produces. ti x on ° } a ~ 
According to the Socialist's use of the term, a day lahor - 
laborer, creating in a year so many hundreds of dollars' 
worth of value and receiving only half of this in wages, is 
being exploited by the capitalist to the amount of value 
retained. In the eyes of the Socialist, exploitation is an 
inevitable result of a system which permits the private 
ownership of the tools of production and the control of 
capital in such a manner that the owner of the machine 
becomes the master. He argues that it is to the interest 
of the tool owner to get the tool user to work at the lowest 
possible wage; hence exploitation eventually results. 

The second criticism which the Socialist urges against 
the present system is that it permits the growth of private 
monopolies and offers no effective way to check G , , 
them. Many fabulous fortunes, he asserts, have private 
been made through the monopoly control of ar- mono ° y ' 
tides of consumption, — coal, meat, ice, and iron ; or 
through the ownership of monopoly business, — street-car 



508 American Economic Life 

lines, telephone, railroad, gas, and water supply companies. 
The Socialist believes that it is hopeless, and furthermore 
undesirable, to endeavor to restore competition as a regu- 
lator of prices. As competition gives way to combination, so 
he believes state monopoly must succeed private monopoly. 

The third criticism which the Socialist urges against 
modern society is its wastefulness. Competition is un- 
Waste of economic ; cooperation, economic. Under the 
effort, competitive system much is done in duplicate, 

and triplicate, that could just as well, under a system of 
cooperation, be done but once. This, he asserts, is par- 
ticularly true in the distribution of goods for consumption. 
A half dozen competing hucksters, milkmen, and icemen 
pass over the same route daily, when half that number 
might have distributed the same amount of goods had 
there been no competition. 

Hence, another criticism of the Socialist is against the 
essentially evil nature of competition. In industrial com- 
Eviis of petition he sees a force that calls out all the bad 
competition. [ n human nature, while at the same time it sup- 
presses much that is good. He charges, that, to undersell 
their competitors and make a profit, men adulterate food, 
employ child labor, violate factory inspection laws, and pay 
low wages. Competition, he persistently maintains, puts 
the law-abiding and humane employer at a disadvantage 
and forces the indifferent employer over into the camp of 
those who seek success at any price. 

Finally, the Socialist criticizes the present industrial 
order on the ground that it does not meet the demands 
Lack of of social justice. He sees in the present system 
justice. no or( i er iy pi an f or constructive development, 

or for distributive justice. On the side of production, he 



Programs of Nationalization 509 

points out the phenomenon of poverty, the lack of employ- 
ment, and the absence of equal opportunity. He regards 
labor as the sole creator of wealth, but sees land and capital, 
the passive factors of production, receiving a large part of 
the total product of industry. Hence, from the standpoint 
of distribution, he argues that distributive justice can be 
secured only when the right of labor to the full product is 
universally recognized. Just how this product is to be divided 
among the workers, the Socialists, however, are not in com- 
plete agreement. Some maintain that it should be distributed 
according to the principle of equality ; others, according to 
actual needs; and still others, according to individual services. 
To remedy these evils that are attributed to the present 
order of things, Socialism comes forward with an entirely 
different plan that strikes at the very founda- its leading 
tions of our present social system. It proposes to P rmci P les : 
substitute for the private ownership of all land ownership 
and capital goods, — factories, railroads, stores, advocaied - 
and the like, — national ownership and operation. In 
this plan the Socialist sees many advantages. Under such 
a system there would be no capitalist to demand interest; 
all the returns of labor would go to labor ; and exploitation 
would cease. As the government would own all the land 
and natural resources, there would be no monopolist's 
profits to be paid out of the pockets of the consumers. 
Since competition would be destroyed, the Socialist pic- 
tures an ideal world in which there would be no further 
incentive to adulteration of goods, to child labor, or to the 
violation of health and fire ordinances. Every child would 
be guaranteed education and support at state expense, and 
every man in old age, after his life work is over, would be 
a pensioner of the government. 



510 American Economic Life 

The Socialist believes that in many ways society has 
outgrown the institution of private property, just as much 
as it has outgrown the institution of property 
property in individuals. He admits that both may have 
been valuable at certain stages in the develop- 
ment of civilization, but asserts that that time is now 
passed. He attacks the institution of private property, 
therefore, and advocates the abolition of the private owner- 
ship of land and the tools of production. In common with 
the Single Taxer, the Socialist believes that the land is a 
free gift of nature, and he would, therefore, socialize it. 
He goes a step farther than the Single Taxer, however, when 
he advocates the abolition of private property in capital 
goods, — factories, railroads, and all direct agencies of pro- 
duction. Capital is to be nationalized in order that the 
capitalist may be eliminated as a claimant in distribution. 
The Socialist wars incessantly against the capitalist, whose 
place is taken in the socialistic regime by the government. 
However, Socialism permits private ownership in consump- 
tion goods ; that is, it leaves to individuals the ownership 
of such articles of consumption as food, housing, and cloth- 
ing, and sanctions private property in incomes allotted to 
individuals by state authority. 

The predictions of the Socialist are so positive and his 

optimism so pronounced that one might be led to believe 

that his plan for social betterment would surely 

Its evils. . . 

inaugurate the millennium. It is here, however, 
that the Socialist makes his greatest error of judgment. 
His optimism for the future is only equaled by his pessimism 
for the present. He forgets that, under Socialism, since 
industries would necessarily be organized on a great national 
scale, the efficiency arising from individual initiative and 



Programs of Nationalization 511 

responsibility would be lacking. The productive machinery 
of society would be less efficient ; there would be less oppor- 
tunity for the genius to make his mark in industry ; govern- 
ment itself might break down under the weight of its indus- 
trial responsibilities. Men and women would still be dis- 
honest, lazy, wasteful, and shiftless under Socialism. 
Officials would still be corrupt ; ambitious men would usurp 
power ; demagogues would secure office ; the difficulty of 
allotting different kinds of labor to different individuals 
would cause envy and dissatisfaction ; the tyranny of the 
majority would be a menace to free speech and personal 
liberty. Finally, if incomes were distributed according 
to the principle of equality, invention and enterprise would 
be stifled. 

To the impartial student, therefore, Socialism does not 
hold out the salvation of mankind. On the contrary, a 
critical analysis of Socialism justifies the con- 

,.-,-, „ , . Its future. 

elusion that the so-called cooperative common- 
wealth might prove more unjust and unsatisfactory than 
the present social order. Its contribution to American 
economic life seems to lie in its attitude toward private mo- 
nopoly. Even here, however, its program is faulty. Only 
in the field of natural monopolies would the principle of 
public ownership — should public control fail — prove 
desirable. It is true that competition gives way to com- 
bination where natural monopolies are concerned. Un- 
regulated private monopoly in such industries is, therefore, 
a menace to social welfare. Hence, government regulation, 
and perhaps eventually public ownership, may offer the 
most effective solution of this most vexatious problem. 
It would only be in this field, however, that the socialistic 
principle would become applicable. Thus agriculture, 



512 American Economic Life 

manufacturing, and commerce would still be largely open to 
private enterprise. In America, therefore, the socialistic 
doctrine seems to offer its greatest field for exploitation 
in the direction of the public control of natural monopo- 
lies. Thus, only indirectly will Socialism accomplish its 
true purpose. It will serve to liberalize our economic 
thinking. 

In closing this discussion of Socialism it may be well to 
distinguish it from various other radical doctrines that 
oth are often thoughtlessly associated with the idea of 

radical Socialism. In popular thought, Socialism and 

Communism are frequently confused. In fact, 
beginning with the last half of the nineteenth century, 
these terms have gradually interchanged meanings. To- 
day Communism signifies the abolition of private property 
not only in production goods, as does Socialism, but also 
in consumption goods, the private ownership of which 
Socialism permits. Collectivism is a term that is often used 
synonymously with Socialism. On the other hand, Anarchy 
is sometimes ignorantly associated with Socialism. As a 
matter of fact, these two systems are diametrically opposed. 
While Socialism advocates the widest possible extension of 
governmental authority, Anarchism preaches the abolition 
of all government, substituting in its place free voluntary 
associations. Again, Socialism should be sharply distin- 
guished from Syndicalism. In America, this movement is 
represented by the Industrial Workers of the World, who 
advocate the control of industry by the workingmen or- 
ganized in trade unions or syndicates. After these syndi- 
cates have secured control of industry, they would then 
attempt to secure control of the government. This 
movement advocates such revolutionary doctrines as 



Programs of Nationalization 513 

sabotage, the general strike, and the " war of the classes. " 
It is therefore absolutely inimicable to social welfare. 

QUESTIONS FOR RECITATION 

1. State briefly the difference between the Single Tax and So- 
cialism. 

2. What do we mean by nationalization as applied to land ? How 
may it be accomplished ? 

3. What is the Single Tax? What is its main purpose? 

4. What is the meaning of "unearned increment"? How does 
it arise? 

5. Why does the Single Tax exempt improvements on land from 
taxation ? 

6. Show how the Single Tax would prevent land speculation; 
show how it would simplify taxation. 

7. Why would the Single Tax increase production? Relieve 
poverty ? 

8. How does the Single Taxer justify his doctrine? 

9. Do you think the Single Tax may be so justified ? 

10. What are the limitations of the Single Tax theory? 

11. Discuss the outlook for the Single Tax. 

12. What is Socialism? What does it emphasize on the side of 
production ? On the side of distribution ? 

13. Outline the arguments in favor of Socialism ; against Socialism. 

14. Contrast Socialism and Anarchism. 

15. In what European countries has Socialism made most prog- 
ress ? Why ? 

16. What is meant by "exploitation of labor"? What is the 
attitude of Socialism toward this doctrine ? 

17. What is the attitude of Socialism toward private monopoly? 
Toward free competition ? 

18. What would Socialism substitute for private monopoly? 
Why? 

19. Would there be any private property under Socialism? To 
what extent ? 

20. Explain the evils of Socialism. What might be the fate of a 
socialistic society? 



514 American Economic Life 

21. What do you think of the future of Socialism in the United 
States ? 

22. What does the Socialist mean by " distributive justice " ? How 
would he secure it ? 

PROBLEMS FOR DISCUSSION 

1. Describe the life of Henry George. 

2. What is "the full economic value of land" which Henry 
George would absorb by a tax ? 

3. Outline the arguments for and against the Single Tax. 

4. What has the Single Tax accomplished as applied in New 
Zealand ? 

5. Is there any connection between the Single Tax Theory and 
the "natural right" doctrine? 

6. Explain just exactly how the Single Tax scheme would be 
administered. 

7. Was Marx correct in assuming that labor is the sole cause of 
value ? 

8. Discuss the different kinds of Socialism. 

9. Why has State Socialism had such a rapid rise in Germany? 
10. What are the leading economic doctrines in the platform of 

the American Socialist party ? 

n. To what group in the community do the doctrines of Social- 
ism make their strongest appeal ? Their weakest appeal ? 

12. Theoretically, which group in the community would be the 
chief gainer through Socialism? Why? 

13. Is Socialism to be judged by its ideal, or by its probable work- 
ing ? Why ? 

14. What are the difficulties which you think the cooperative 
commonwealth would experience ? 

15. Do you think it possible for a government representing the 
workers to take over one great industry after another, and to operate 
these great industries for the common welfare ? 

16. Does the Socialist urge equal distribution of wealth? 

17. What are the forces making for Socialism in the United 
States to-day ? What are the forces militating against Socialism ? 

18. Why is it not right to say of every public interference in in- 



Programs of Nationalization 515 

dustry that it is socialistic? When may a measure be called so- 
cialistic ? 

19. Is the idea of equal opportunity characteristic of Socialism 
only? 

20. Explain the meaning of Syndicalism. Where has it devel- 
oped? 

21. Show the evils of this revolutionary doctrine. 

22. Why is it absolutely unsuited to American conditions? 

SUPPLEMENTARY READING 

Ely, R. T. Socialism and Social Reform. 

George, H. Progress and Poverty. 

Hillquit, M. History of Socialism in the United States. 

Kirkup, T. History of Socialism. 

Rae, J. Contemporary Socialism. 

Seager, H. R. Introduction to Economics, pp. 517-525. 

Seligman, E. R. A. Essays in Taxation, pp. 64-94. 

Spargo, J. Syndicalism, Industrial Unionism, and Socialism. 

Spencer, H. Man vs. the State. 

Zenker, E. V. Anarchism. 



CHAPTER XLIX 

Economic Reform and Social Progress 

I. Justification of progress 
i . What is progress ? 
2 . Its philosophical basis : 

a. Influence of environment : 
(i) The two forces 

(2) The old fatalism 

(3) The new optimism 

b. Belief in natural capacity : 

(1) The opposite view 

(2) The present attitude 

II. Requisites of progress 

1 . The ideals : 

a. Opportunity 

b. Social adjustment 

c. Efficiency in education 

d. Leisure 

e. Recreation 
/. Health 

2. The method 

At first glance the various experiments and programs 
for individual and social betterment seem to have little 
in common. From the benevolent attempts of the em- 
ployer to improve the condition of the worker to the in- 
sistent demands of the Socialist for the national ownership 
of the tools of production, there are many varieties of 
proposals. But, while these programs of economic reform 
show much diversity of thought and opinion, they never- 

516 



Economic Reform and Social Progress 517 

theless have a common basis. All rest upon the belief 
that the economic and social conditions of American life 
demand improvement, — all are programs of social prog- 
ress. 

Justification of Progress. — After all, then, these diverse 
plans of economic reform have a unity of purpose, — a 
desire to better the condition of the worker, what is 
Their advocates, who believe absolutely in the P r °s r ess? 
attainment of progress, are sharply distinguished from those 
reactionaries who believe that, " Whatever is, is right." 
These progressive thinkers are not content with " well 
enough " ; they are always striving for " something better." 
Progress is the goal of all their activities. But what is 
social progress ? It is the forward movement of all members 
of society, — not the mere advance of particular individuals. 
From an economic standpoint, progress is measured by 
individual and social welfare, and the test of this welfare 
is individual and social prosperity. Thus, progress is not 
only the goal of economic endeavor, but it is also the goal 
of economic reform. 

What reason have men for believing that social progress 
is possible? To answer this question, one must understand 
the character of the forces at work in shaping i tsbasis: 
the destinies of life. Broadly speaking, these influence of 
forces are those of heredity and environment. enmronment . 
Every one's life is a product of these two forces. Man is 
thus a combination of inherited traits and acquired char- 
acteristics. But which of these two sets of forces is the 
dominating element in the life of man? One's attitude on 
this question determines one's philosophy of life. The 
advocate of progress bases his belief on the dominating 
influence of social environment. 



518 American Economic Life 

The effect of the opposite view — that man's course is 
chiefly determined by physical and mental heredity — is at 
once apparent. If this be true, progress in many cases is 
impossible of attainment. According to this belief, men 
may be born vicious, and their offspring destined by the 
laws of heredity to remain so from generation to generation. 
This represents the old fatalistic attitude towards life. So 
long as men believed that the evils of the past were trans- 
mitted to the present, social progress was practically im- 
possible. There was no possibility 6i going into the past 
and influencing the parents of the present generation. 
This present generation, depraved because of the depravity 
of its ancestors, must in its turn hand on its low standards 
to the generations of the future. Thus the process would 
be endlessly continued through years of hopeless despond- 
ency. This old belief in hereditary depravity kept society 
from properly educating the child, prevented normal care 
of the criminal and social outcast, and, in every direction, 
restricted individual and social betterment. 

The new view, however, is full of hope and promise. 
The modern social thinker has shaken himself free from the 
old fatalistic belief in the inheritance of acquired char- 
acteristics ; and announces fearlessly that, since he believes 
that only inborn traits are usually inherited, the vast 
majority of social evils which beset mankind are not the 
product of heredity, but are generated largely by the 
social environment. This view, by emphasizing the fact 
that most men are normal, makes progress possible. It 
forms the basis of a new optimism and is characteristic of 
the attitude of the modern social worker. According to 
this belief, social and economic conditions may be improved 
largely by improving man's environment. The funda- 



Economic Reform and Social Progress 519 

mental evil lies not in the individual, but in conditions 
surrounding him. If bad living and working conditions 
are responsible for misery and vice, the surroundings of the 
worker must be improved. Instead of the past, the present 
must be investigated. Each generation starts afresh, and, 
by improving its surroundings, rises to a higher level of 
social welfare than that reached by its predecessor. Thus 
social progress is attained through economic betterment. 

The other side of this conviction, that improvement in 
environing conditions will alleviate misery and vice, is ex- 
pressed, of course, in the belief in man's natural 7 . , . 
capacity. These convictions are complemen- natural 
tary. Man himself is believed to be thoroughly capaci y ' 
capable of improvement, and this belief furnishes a real 
basis for progress. This concept of natural capacity 
dominates the thought of a progressive society. If people 
were born with a fatalistic curse upon their heads, if 
total depravity were an inherited thing — the product of 
the degeneracy of past ages — progress would hardly be 
possible. During the centuries when such ideas were 
held, but little progress in the condition of the masses was 
made, because each person felt the impossibility of a for- 
ward social movement. Recent years, however, have 
seen a distinct change in this respect. Thinkers now 
vigorously, maintain the possibility of improvement ; they 
have turned from the argument of " total depravity " to 
lhat of " natural capacity." 

Requisites of Progress. — If, then, man is capable of 
improvement and progressive development, what is required 
to call this forth? In the first place, he must The ideals: 
be given opportunity. This was emphasized at opportunity. 
the outset of our study, and it is now restated in its closing 



520 American Economic Life 

pages. Equal opportunity, however, means neither equal- 
ity nor identity. An embryotic painter and an embryotic 
engineer are neither equal nor identical, yet each may be 
afforded an equal chance to develop his particular talent. 
Thus, equal opportunity means simply an equal chance to 
advance and is advocated, regardless of any particular 
program of reform, by all believers in progress. If, to- 
day, nine-tenths of the men and women about us are born 
approximately normal and naturally capable, they will 
all be competent to progress when given equal opportunities. 

But something more than opportunity is essential to 
social progress. Society needs adjustment. In order to 
Social ad- secure this universality of opportunity which will 
justment. permit of individual development, changes must 
be made in environing conditions. Families are underfed 
and badly housed ; children are sent into the mills at 
fourteen ; the school system is not planned primarily for 
the worker ; men die at an early age because of industrial 
accidents and preventable diseases. These maladjust- 
ments which are responsible for lack of opportunity must 
be swept aside. No conscious will has placed obstacles in 
the way of man's development ; and, through adjustment, 
society itself must remove them wherever they exist. 

Qf equal importance with opportunity and adjustment 
is efficiency. When society provides the first two elements 
Efficiency in efficiency will normally follow. In all directions 
education. ^g cr y f efficiency is heard. If progress is to 
be attained, society as well as individuals must develop the 
capacity to produce maximum results with minimum out- 
lays. In the factory, in the home, in the school, in the 
nation — everywhere — efficiency is equally essential. All 
programs of genuine progress emphasize this as one of the 



Economic Reform and Social Progress 521 

foundation stones of progress. Efficiency, of course, is at- 
tained through some form of industrial education. Thus, 
the economic importance of education becomes at once 
apparent. Efficiency, as we have previously seen, also 
involves conservation. 

With the attainment of opportunity, adjustment, and 
efficiency, come other ideals of progress. Chief among 
these are leisure, recreation, and health. With- 

. . . mix Leisure. 

out free activity, progress is not possible. In- 
dividuals must have spare time in which to do those things 
that it is impossible to accomplish in the rush of industrial 
life. The great achievements of the world are often the 
products of leisure time. When men and women are edu- 
cated to a wise use of free time, a shorter working day will 
prove of inestimable advantage to true progress. 

Along with the requisite of leisure comes the chance for 
recreation. To be progressive — to be able to move 
forward in the affairs of life — man must have 

t 1 • • rrvi • • Recreation. 

some relief from the strain of industry. This is 
afforded through proper facilities for recreation. Thus, 
realizing that recreation is an ideal of true progress, mu- 
nicipalities every year appropriate large sums of money for 
playgrounds, parks, and recreation piers ; while in many 
directions attempts are being made to regulate theatrical 
performances and motion picture exhibitions. At the 
same time, society is directing its efforts toward providing 
some legitimate form of recreation for rural districts. 

Another ideal absolutely essential to progress is that of 
health. It is, in some respects, the most vital of them all. 
Without a strong, robust body, life is often un- 

• • -ii T Health. 

desirable if not impossible. In every program 

of social progress, therefore, full provision should be made 



522 American Economic Life 

to develop and maintain sound health. The social worker, 
to-day, realizes the necessity for this ideal more than any 
other reformer. In early times, men often believed that 
disease came as a punishment for wrongdoing and was an 
evidence of divine wrath. This was a remnant of the old 
fatalistic attitude toward life. To-day, men have scientifi- 
cally demonstrated that, not offended deities, but germs 
and bacteria are the cause of sickness and disease. Malaria 
is not carried through the air in the form of a vapor, but is 
transmitted through the sting of a mosquito. Remedy for 
malaria, therefore, takes the form, not of sacrificial offer- 
ings, but of a generous application of crude oil to the 
marshes and ponds in which the mosquito breeds. Thus, 
science puts to rout the old fatalism, and helps in the cause 
of social progress. 

Concerning these ideals of progress all reformers are in 
practical accord. All would move in the same direction, 
The with the same general end in view. It is not 

method. tne en( j — ^ g Qa j Q £ p r0 g ress — U p 0n w hi cn 

social reformers differ ; it is the means — the method of 
attaining their ultimate desire. But even here there is 
some agreement, — some measure of unison. This mani- 
fests itself chiefly in one direction. It is generally admitted 
that social progress should be attained, not through rapid 
revolution, but through gradual evolution. Sudden dis- 
turbances seldom effect permanent changes. Through the 
slow process of time, extending over many generations 
and even centuries, progress is attained. To be sure, 
revolutions do occur ; and, when they take place, thought 
and discussion are provoked. Nevertheless, no one can 
reasonably maintain that an economic or social revolution 
will immediately and permanently change habits of thought 



Economic Reform and Social Progress 523 

crystallized for centuries in national character. The in- 
coming of the factory system and the enunciation of Dar- 
win's concept of evolution are good illustrations of revolu- 
tionary changes in economic belief and social thought. Yet, 
in both these cases, the corresponding change in popular 
opinion required years of education for its completion. 
So, inevitably, it must be with any fundamental reform 
instituted in behalf of social progress. Revolution is un- 
certain ; evolution is unfailing. 

QUESTIONS FOR RECITATION 

1. What is the relation between economic reform and social 
progress ? 

2. Define progress. What is meant by the term "reactionaries " ? 

3. What reasons have men for believing that social progress is 
possible ? Did Malthus believe in progress ? Explain. 

4. Explain the two forces at work in the life of every individual. 

5. How does the biological belief in the non-inheritance of 
acquired characteristics affect one's belief in progress ? 

6. What is fatalism? What lies at the basis of this belief? 
How does it handicap social progress ? 

7. Give some illustrations of belief in fatalism at work in 
human history. 

8. Distinguish between physical and social environment. Which 
is the advocate of progress most interested in ? Why? 

9. If, biologically, acquired characteristics are not usually in- 
herited, how can social conditions improve from generation to genera- 
tion? 

10. What is the doctrine of total depravity? What are its con- 
sequences ? 

11. How is the idea of natural capacity linked with the theory of 
the dominating influence of social environment ? 

12. Name the requisites of progress. If compelled to, which 
would you eliminate ? 

13. Show the relation between opportunity and social adjust- 
ment. 



524 American Economic Life 

14. Give some illustrations of needed social adjustments. 

15. Explain how efficiency may be attained. How it may be over- 
emphasized ? 

16. Show the relation between leisure and recreation. Why are 
they included in the requisites of progress ? 

17. Give definite examples of how society may improve the 
health and life of the community. How may the individual help 
in this direction ? 

18. What similarity exists in all sane programs of economic re- 
form ? 

19. Why is revolution unsatisfactory, if not harmful, in dealing 
with economic and social abuses ? 

PROBLEMS FOR DISCUSSION 

1. Discuss your idea of progress. 

2. What part does the social environment play in progress? 
Give examples. 

3. Why are modern thinkers optimistic? 

4. What is meant by the expression "environment is plastic"? 

5. What basis does the belief in natural capacity furnish for 
optimism? 

6. What part will opportunity play in progress? Give illus- 
trations. 

7. What measures are being taken to-day to prevent infant 
mortality? Premature employment ? Why? 

8. What steps are being taken to accomplish a better distribu- 
tion of population in this country ? Why ? 

9. What are some of the leading lines of activity in social work 
now being undertaken in America ? 

10. Which is more important, approximate equality of posses- 
sions, or approximate equality of opportunity? Do we have to 
destroy the present order of things to secure the latter ? 

11. With a more general diffusion of knowledge, culture, and 
publicity, is political democracy in more or less danger ? Is equality 
of opportunity more or less likely to ensue ? 

12. Discuss "eclecticism" in social and economic reform. 

13. What is meant by "meliorism"? 



Economic Reform and Social Progress 525 

14. Explain why the evolutionary method is necessary in bring- 
ing about social changes. 

15. Why is revolution ever resorted to? 

16. How aore economic reforms brought about in the United 
States ? Give examples. 

SUPPLEMENTARY READING 

Chapin, F. S. Social Evolution, Chaps. I- VI. 
Conklin, E. G. Heredity and Environment. 
Conn, H. W. Method of Evolution. 
Devine, E. T. Social Forces. 
Patten, S. N. New Basis of Civilization. 
Patten, S. N. Product and Climax. 
Schmucker, S. C. Meaning of Evolution. 



INDEX 



Accidents : 

causes, 149. 

effects, 152. 

kinds, 149 et seq. 

number, 151. 

remedy, 155. 
Adjustment: 

meaning, 13, 14, 15. 

requisite of progress, 520. 
Agencies : 

land transportation, 273 et seq. 

water transportation, 113 et seq., 280 
Agriculture : 

development, 210. 

early methods, 212. 

importance, 213. 

kinds, 213 et seq. 

training, 216. 
American foreign trade : 

exports, 375. 

imports, 376. 
Americanization, 136, 142, 305. 
Animal life, 228. 
Anti-trust Act, 259. 
Apportionment of taxes, see Taxation. 

B 

Banking : 

cooperation in, 470. 

operations of, 191, 351. 
Barter, 337. 

Bills of exchange, see Credit. 
Bonds, 363. 

Book credit, see Credit. 
Boycott : 

forms, 483. 

meaning, 482. 
Burden of taxation, see Taxation. 
Business organization : 

early forms, 254 et seq. 

later forms, 257 et seq. 
By-products, 247. 



Capital : 

and surplus wealth, 200 et seq. 

character, 180. 

definition, 182. 

efficiency and, 194, 306, 434. 

importance of, 180. 

kinds, 195, 196. 

law of increase, 194, 195, 306. 

management, 197, 248, 249, 261, 309. 

origin, 190 et seq. 

reward of, 431. 
Capital goods, 187. 
Cereals, 214. 
Checks, ,see Credit. 
Child labor : 

consequences, 160 et seq. 

extent, 159. 

regulation, 162. 
China, 30 et seq. 
Circulating capital, see Capital. 
City life, 206. 
Civilization, 203, 310. 
Clayton Act, 260. 
Climate, 83. 
Clothing, 52, 53. 
Coal: 

consumption, 87. 

danger from dust, 153 et seq. 

kinds, 88. 
Colonists : 

of Middle States, 131. 

of North, 130. 

of South, 132. 
Combinations, see Corporations and 

Trusts. 
Commerce : 

early restrictions, 235, 285. 

regulation of, 258, 289. 
Compensation acts, 155. 
Competition : 

and price, 321. 

evils of, 508. 

importance of, 403. 

527 



528 



Index 



Conservation : 

of health, 24. 

of industry, 23. 

of labor, 124. 

of natural resources, 22, 90, 101 et 
seq., 302. 
Consumption : 

cooperation in, 470. 

meaning, 41. 

principles, 43, 44. 

productive and unproductive, 42, 182. 
Cooperation : 

advantages, 267. 

and surplus wealth, 202. 

experiments, 469. 

outlook, 473. 

stages, 266. 
Copper, 89. 
Corn, 214, 230. 
Corporations : 

advantages, 256. 

and finance, 363. 

nature, 255. 

regulation of, see Trusts. 
Cost of living : 

differences in, 53, 54. 

items in, 52. 
Cost prices, 494. 
Cotton gin, 211. 
Cover crops, 223. 
Credit : 

advantages, 354. 

and banking, 354.- 

kinds, 350 et seq. 

meaning, 349. 
Currency Act, 341. 



D 



Dairying, 215. 
Dangerous trades : 

chief source of danger, 153. 

lead poisoning, 154. 

remedy, 155. 
Deflation, 359. 
Demand, see Supply. 
Diet, 44. 

Differential rent, see Rent. 
Differentiation : 

in education, 175. 

in industry, 248. 

in labor, 266. 



Direct taxes, see Taxation. 
Dismal swamp, 98. 
Distribution of wealth : 

meaning, 397. 

outlook for labor in, 453. 

shares, 398. 

summarized, 459. 

theories, 403. 
Division of labor, 248, 266. 
Domestic system, 237. 
Drainage : 

extent in United States, 97 et seq. 

method of, 99. 
Duties, see Taxation. 



Economic ideals, see Ideals. 
Economic life, 39, 40. 
Economic programs, see Programs. 
Economic rent, see Rent. 
Economics : 

meaning, 1. 

study, 2. 
Education : 

differentiation in, 175. 

function of, 170 et seq. 

progress and, 172, 173. 

uniformity in, 173. 
Efficiency, 18 et seq., 297 et seq. 
Electric power, no et seq. 
Electric traction : 

rural, 279. 

urban, 279. 
Elkins Act, 289. 
Eminent domain, 276. 
Entrepreneur : 

grades, 446. 

meaning, 254, 444. 
Environment, 13, 32, 517. 
Esch-Cummins Act, 291. 
Excess profits tax, 388. 
Exchange : 

bills of, 352. 

meaning, 316. 

method of, 337, 373. 

rate of, 378. 
Excises, see Taxation. 
Experiments : 

in cooperation, 469. 

in profit sharing, 464. 

in welfare work, 467. 



Index 



529 



Exploitation, 401, 507. 
Exports, 375. 
Express companies : 

growth, 278. 

regulation, 278. 



Factory system : 

advantages, 240. 

disadvantages, 240. 

features, 239. 
Farming, 213. 
Fatalism, 12, 520. 
Federal Reserve Act, 356. 
Federal Trade Commission, 260. 
Fertility : 

exhaustion, 219 et seq. 

restoration, 222 et seq. 
Fertilizers, 222. 
Finance : 

evolution of, 363. 

modern method, 364 et seq. 

results, 367. 
Fixed capital, see Capital. 
Florida Everglades, 98. 
Food, 53. 

Foreign trade, see International Trade. 
Forests : 

conservation, 22, 107. 

destruction, 104 et seq. 

groups, 102 et seq. 
Franchise monopolies, see Monopolies. 
Free capital, see Capital. 
Free goods, 4. 
Free trade, 381. 
Fruit growing, 215. 
Fuel, 54, 87 et seq. 
Funds, see Finance. 



Gas, 88. 

General property tax, see Taxation. 

Goods, 5. 

Government ownership, 509. 

Government regulation : 

of railroads, 287 et seq. 

of trusts, 259. 

program of, 488. 
Grades of : 

entrepreneurs, 446. 

laborers, 269. 

land, 411. 



Gresham's law, 342. 
Group monopoly, 455. 



H 



Health, 521. 

Holding company, 258. 

Hours of work : 

regulation of, 491. 

unionism and, 479. 
Humus, 221. 
Husbands of industry, see Cooperation. 



Ideals, 17 et seq., 519 et seq. 
Illiteracy, 174. 
Immigrants : 

character, 133 et seq. 

groups, 141. 
Immigration : 

causes, 139 et seq. 

effects, 141 et seq. 

restriction, 144. 
Imports, 375. 
Income : 

inequalities in, 399. 

problem of, 57 et seq. 

taxation of, 387. 
Income Tax, 387 et seq. 
Indirect taxes, see Taxation. 
Individual monopoly power, 454. 
Individualism, 489. 
Industrial monopolies, see Monopoly. 
Industrial revolution, 237 et seq. 
Industry : 

accidents in, 149. 

character of American, 243 et seq. 

kinds of, 234. 

specialization in, 248, 267. 

women in, 162. 
Inflation, 65. 
Interest : 

nature of, 431 et seq. 

rate of, 435 et seq. 

source of fund, 438. 
Interlocking directorates, 368. 
International trade : 

basis, 374. 

characteristics, 377. 

restriction of, 379. 



53o 



Index 



Interstate Commerce Act : 

main provisions, 287. 

modifications, 289 et seq. 
Inventions : 

effect, 238. 

importance, 237. 
Iron, 89. 
Irrigation : 

Act of 1902, 95 et seq. 

advantages, 97. 

extent of, 95. 



Japan, 30. 



K 



Knights of labor, see Cooperation. 



Labor : 

character in the United States, 302. 

conservation of, 124. 

division of, 266. 

education of, 170 et seq. 

effect of immigration on, 143. 

groups of, 129 et seq., 422. 

importance of, 121. 

law of increase, 125, 303. 

meaning of, 122. 

monopoly power of, 331, 454. 

of children, 159, 491. 

of women, 162 et seq., 491. 

organization of, 268, 454, 476. 

problems of, 159 et seq. 

risks of, 149 et seq. 
Land: 

and production, see Natural Resources. 

and taxation, see Single Tax. 

importance of, 81 et seq. 

monopoly of, 400, 415. 
Large-scale production : 

advantages, 245 et seq. 

disadvantages, 248. 

nature of, 243 et seq. 
Law of diminishing returns, 84 et seq., 

300. 
Legislation : 

for railroads, 287 et seq. 

for trusts, 258 et seq. 
Legumes, 223. 



Leisure, 205. 
Liability acts, 155, 492. 
Light, 330. 
Literacy test, 145. 
Living : 

cost of, 50. 

standard of, 51 et seq. 
Loans, 432. 

M 

Machinery : 

development, 238, 239, 267,, 

importance, 212, 238. 
Maladjustments, 520. 
Mai thus, 125. 
Manager, 269. 
Manufacturing, 239. 
Manure, 221. 
Marginal rent, see Rent. 
Market gardening, 215. 
Minerals, see Natural Resources. 
Mining accidents, see Accidents. 
Mississippi River, 116. 
Mobility of labor, 427, 456, 466. 
Money : 

and capital, 184 et seq. 

and exchange, 338. 

and price, 65, 345. 

problems of, 6, 336 et seq. 
Monopoly : 

and labor, 331, 454. 

and price, 325 et seq. 

and railroads, 275, 293. 

and wages, 425, 455. 

kinds of, 327 et seq. 

of capital, 328, 401, 437. 

of land, 327, 400. 

theory of, 404. 

N 

National Bank Act, 355. 
Natural capacity, 12, 13, 519. 
Natural monopolies, see Monopoly. 
Natural resources : 
importance of, 75 et seq. 
of China, 31. 
of United States : 

agriculture, 209 et seq. 
forests, 102 et seq. 
minerals, 87 et seq. 
water, 109 et seq. 



Index 



53i 



Niagara Falls, 11 1. 
"No-rent" lands, 412. 
Notes, see Credit. 





"One crop" system, 220. 
Opportunity, 11, 12, 519, 520. 
Optimism, 13, 518. 
Organization : 

of business, 254 et seq. 

of labor, 265 et seq. 
Organizer, 268. 
Overcapitalization, 367. 
Overproduction, 375. 



Panama Canal, 115. 
Paper money : 

advantages of, 342. 

kinds of, 343. 
Partnership : 

advantages, 255. 

disadvantages, 255. 

nature of, 255. 
Petroleum. 88. 
Police power : 

application, 491. 

meaning, 490. 
Pools, 257. 
Population : 

checks on, 125, 126. 

China, 30. 

United States : 

early character, 129 et seq. 
later character, 133 et seq. 
Price : 

and monopoly, 325. 

and surplus wealth, 204. 

and value, 320, 344. 

and wages, 63. 

fall of, 67. 

how determined, 321. 

meaning of, 320. 

regulation of, 333, 496. 

rise of, 64. 

World War and, 65. 
Production : 

cooperation in, 202, 472. 

factors of, 74, 75, 298 et seq., 457. 

large-scale, 243 et seq. 



Production (Continued) : 

meaning, 72. 

of new species, 227 et seq. 
Productivity, 400, 424, 439. 
Profits : 

law of, 446 et seq. 

meaning, 443. 

nature of, 445. 
Profit sharing : 

difficulties, 466. 

experiments, 465. 

forms, 464. 

meaning, 464. 
Programs : 

of regulation, 488 et seq. 

of socialization, 500 et seq. 

of unionism, 476 et seq. 
Progress : 

basis of, 517 et seq. 

method of, 522. 

requisites of, 519 et seq. 
Promoter, 365. 
Prosperity : 

individual, 34, 35. 

national, 30 et seq. 
Protection, see Tariff. 
Public land, 211, 299. 
Public monopolies, see Monopoly. 



Quasi-public corporations, 276. 



R 

Races : 

characteristics, 133, 141. 

effect on labor, 143 et seq. 
Radical doctrines, 512. 
Railroads : 

control, 273, 287 et seq. 

government operation, 2go. 

growth, 274. 

importance, 274. 

nature, 275. 
Rate of exchange, 378. 
Reclamation : 

through drainage, 97 et seq. 

through irrigation, 94 et seq. 
Recreation, 205. 
Regulation : 

of capital, 197, 292, 495. 



532 



Index 



Regulation {Continued) : 

of finance, 369. 

of labor, 491, 495. 

of prices, 494, 496. 

of railroads, 287 et seq. 

of trusts, 258 et seq., 293, 495. 
Rent: 

and standard of living, 51. 

kinds of, 414 et seq. 

'law of, 412 et seq. 

meaning of, 408. 

single tax and, 501. 
Requisites : 

of managing ability, 268, 444. 

of production, see Factors of. 

of progress, 519. 
Resources, see Natural Resources. 
Risk: 

and labor, 148 et seq. 

and profits, 445. 



Sanitation, 468, 493. 
Saving : 

and interest, 434. 

and surplus wealth, 206. 

how capitalized, 192. 

origin of, 191. 
Selection : 

artificial, 227. 

effects of, 228 et seq. 

natural, 227. 
Sherman Act, 259, 289. 
Single tax : 

advantages, 502. 

basis, 504. 

future, 505. 

meaning, 502. 
Socialism : 

and interest, 438. 

character, 506. 

criticisms, 507. 

limitations, 510. 

principles, 509. 
Social work, 517-519. 
Societies, 310. 
Soil: 

conservation of, 222 et.seq. 

exhaustion of, 219 et seq. 

importance of, 84. 
Specialized capital, see Capital. 



Standard of living : 

elements in, 51. 

meaning of, 47. 

wages and, 51. 
Standard prices, 377. 
Steam engine, 211. 
Stock raising, 214. 
Stocks, 363. 
Strikes : 

effects, 482. 

meaning, 481. 
Substitution : 

effect, 457. 

meaning, 456. 
Supply and demand : 

and value, 320, 341, 346. 

of capital, 305, 435. 

of goods, 307. 

of labor, 303, 423. 
Surplus wealth, 33, 200 et seq. 
Swamps, 97 et seq. 



Tariff : 

advantages, 380, 382. 

defects, 380. 

purpose, 236, 379. 

revision, 381. 
Taxation : 

and rent, 501. 

federal, 386. 

kinds of, 385 et seq. 

principles of, 390 et seq. 

purpose of, 390. 

state and local, 389. 
Telegraph, see Transportation. 
Telephone, see Transportation. 
Thrift, 25, 194. 
Trade : v. 

balance of, 376. 

development of, 373. 

international, 374- 

restrictions on, 235, 379. 
Trade agreement, see Unionism. 
Trade unions, see Unionism. 
Transportation : 

electric traction, 279. 

express companies, 278. 

railroad, 274. 

regulation of, 287 et seq.^ 

telegraph, 277. 



Index 



533 



Transportation {Continued) : 

telephone, 277. 

water, 113, 280. 
Trusts : 

finance, 364. 

forms of, 257 et seq. 

nature of, 257. 

regulation of, 258 et seq. 

U 
Unemployment : 

causes, 165. 

effects, 166. 

remedy, 167. 
Unionism : 

qharacter, 477. 

outlook, 483. 

program, 478. 

weapons of, 480. 
United States : 

agriculture in, 209 et seq. 

and China, 30 et seq. 

banking system of, 354. 

business organization in, 253 et seq. 

climate of, 83. 

forests of, 102 et seq. 

industry in, 243 et seq. 

labor in, 129 et seq. 

minerals of, 87 et seq. 

transportation in, 273 et seq. 

wages in, 57 et seq. 

water resources of, 109 et seq. 
United States Steel Corporation, 261, 366. 
Utility : 

and value, 316. 

kinds of, 72 et seq. 

law of, 50. 

meaning of, 49. 



Valuation, 436. 
Value : 

and price, 320. 

in exchange, 319. 

in use, 318. 

nature of, 316. 



Variety : 

in consumption, 44. 

in new species, 226 et seq. 
Vegetable life, 229. 



W 

Wages : 

actual wages, 63. 

and prices, 63. 

and World War, 59 et seq. 

efficiency wages, 61. 

money wages, 420. 

real wages, 420. 

theory of, 419 et seq. 
Wage worker : 

semi-skilled, 270. 

skilled, 269. 

unskilled, 270. 
Wants : 

kinds, 48. 

meaning, 49. 
Water : 

Act of 1920, 113. 

for power, 109 et seq. 

for transportation, 113 et seq. 
Waterways, 114, 280. 
Wealth, 2, 3, 4, 317. 
Welfare, 10. 
Welfare work : 

forms of, 468, 469. 

meaning of, 467. 

origin of, 468. 
Wheat, 214, 229. 
Women workers : 

arguments .against, 164. 

arguments in favor of, 164. 

causes of, 162. 
Wood, see Forests. 
World markets, 377. 
World War: 

and capital, 184, 307. 

and labor, 304. 

and land, 301. 

and prices, 65, 307. 

and wages, 59 et seq. 



Printed in the United States of America. 



